SEC Proposes Rules to Enhance and Standardize Climate-Related Disclosures

SEC Proposes Rules to Enhance and Standardize Climate-Related Disclosures

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On March 21, 2022, the U.S. Securities and Exchange Commission (“SEC”) proposed modifications to SEC rules under the Securities Act of 1933 and Securities Exchange Act of 1934 that would mandate climate risk disclosures by public companies. If adopted, the rules will “require registrants to provide certain climate-related information in their registration statements and annual reports,” including climate-related financial risks and metrics in their financial statements. The proposed rule comes in light of a growing SEC focus on disclosures to investors related to environmental, social and governance (“ESG”) factors.

The term “climate-related risks” has nested meaning and its origins can be found in a climate-related reporting framework developed by the Task Force on Climate-Related Financial Disclosures (“TCFD”). The SEC regards TCFD’s framework as “widely accepted by both registrants and investors” and, in the proposed rule, the SEC based its definitions on TCFD’s definitions.

The proposed rule changes would require a company to disclose information about:

  • Its governance of climate-related risks and relevant risk management processes.
  • How any climate-related risks identified by the company have had or may have a material impact on its business and financial statements.
  • How any identified climate-related risks have affected or are likely to affect the company’s strategy, business model and outlook.
  • The impact of climate-related events and transition activities on the line items of a company’s consolidated financial statements, as well as on the financial estimates and assumptions used.

The proposed rules would also require a company to disclose information about its Scope 1 and Scope 2 greenhouse gas (“GHG”) emissions – emissions which “result directly or indirectly from facilities owned or activities controlled by a registrant.” Companies would also be required to disclose GHG emissions from upstream and downstream activities in their value chains if such emissions were material to investors, or if any such companies made a commitment which references Scope 3 emissions.

SEC Chairperson Gary Gensler issued a statement expressing his support for the proposal. In a dissenting statement, SEC Commissioner Hester M. Peirce conveyed the perspective that the proposal “will undermine the existing regulatory framework,” which has been implemented to provide investors with “an accurate picture of the company’s present and prospective performance through managers’ own eyes.”

While the enhanced disclosure requirements would provide useful information to investment advisers who manage ESG strategies, they should plan to update their portfolio management processes to include consideration of these disclosures, where relevant. Advisers should assume that examiners will expect documentation that these disclosures were reviewed.

If you have any questions about how this proposed rule would affect your firm or your firm’s ESG strategy, please contact your Greyline representative.

The SEC press release is here.

The proposed rule is here.

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Darren Mooney

Partner and Co-Head of Business Development

Darren Mooney is a Partner and the Co-Head of Business Development at Greyline. Before joining Greyline, Darren served as deputy chief compliance officer of Partner Fund Management where he held primary responsibility for the compliance program of the second-largest hedge fund in the Bay Area. Prior to that, Darren spent five years providing compliance consulting services at Cordium and then ACA Compliance Group, where he led the company’s San Francisco office and west coast operations. In addition to providing ongoing consulting services to a variety of investment managers, including hedge fund, private equity, venture capital, real estate, quantitative and other wealth managers, Darren also regularly guided clients through the SEC registration process, implemented tailored compliance programs, supported clients’ live SEC exams, and served as an SEC-mandated independent compliance consultant following an SEC enforcement action. Darren’s other experience includes serving as deputy chief compliance officer and associate counsel at F-Squared Investments where he directly supported the compliance program during the investigation and subsequent enforcement regarding historical advertising practices. Darren has a B.S. in Economics from the University of Delaware and a J.D. from Suffolk University Law School. He is a member of the Massachusetts bar.

Annie Kong

Partner and Head of Venture Capital
Annie Kong is a Partner and Head of the Venture Capital Division at Greyline. She provides ongoing compliance consulting to investment advisers and manages client relationships. Prior to joining Greyline, Annie was part of compliance and operations at a long-only manager-of-managers that advised pension fund clients. While there, she conducted compliance and operational due diligence on SEC-registered investment advisers on the platform. She also oversaw and counseled on various legal matters across the firm. Annie has a B.A. in Economics from the University of California, San Diego, and a J.D. from the University of San Diego School of Law. She is an active member of the State Bar of California.
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