Hello from New York. As the dust settles on the excitement from Washington this week, we have an analysis today on some of the key aspects of the Securities and Exchange Commission’s climate disclosure rule.
From London, Simon unpacks what the UK’s Budget (also unveiled on Wednesday) means for green investment. It has been a pivotal week for climate concerns. Let us know what your reaction has been to this big week on our beat. And thank you for reading. — Patrick Temple-West
CLIMATE DISCLOSURE
What you need to know about this week’s SEC news
Shortly after Joe Biden was inaugurated as president in 2021, the SEC embarked on an ambitious project to require companies to disclose information about their greenhouse gas emissions. After years of fighting, the SEC on Wednesday enacted a rule that for the first time will require company disclosures on climate risks.
The extent of the required disclosures was scaled back from what the agency first floated. Still, the final rule requires thousands of companies to report some greenhouse gas emissions in an attempt to provide investors with more consistent, reliable and comparable climate disclosures.
Dead on arrival?
US Republicans didn’t wait for the SEC to finish its rule to start working on their fightback. They had drafted a lawsuit before Wednesday and raced to court as soon as the SEC adopted the final language.
And there is little chance the Republicans’ litigation will be the only legal challenge.
“We expect the US Chamber of Commerce to challenge the rule in court,” investment bank TD Cowen said in a research note on Wednesday. “We expect the SEC will lose at the trial court and appeals court as we expect these courts will conclude Congress did not expressly authorise the SEC to require this type of disclosure.”
This is despite the SEC’s jettisoning big chunks of its initial climate proposal in hope of surviving the legal onslaught. The original version of the rule included so-called scope 3 emissions, a broader measurement that includes emissions from a company’s had been chain and the use of its products. But scope 3 requirements were taken out by Wednesday.
Asset management sources told me this week that they expect the climate rule’s foes to fight all the way to the US Supreme Court. With a strong conservative majority on the bench, that would put the rule in jeopardy.
For all the ink spilled about this SEC rule, it might not ever go into force.
Materiality mayhem
Assuming the SEC rule does survive, it will be a weak link in the chain of climate reporting regulations around the world. Europe’s Corporate Sustainability Reporting Directive (CSRD) requires scope 3 reporting and “double materiality,” meaning companies need to report on their impacts on the environment and society, as well as related risks to their business. The International Sustainability Standards Board, which is working to promote standards that can be used by regulators around the world, has also suggested scope 3 reporting requirements for many companies.
But the SEC said disclosure of scope 1 and 2 emissions — those from a company’s own operations, and from its energy usage — will only be needed if they are deemed material to a company’s revenues, and not all companies might need to make these disclosures. Essentially, the scope 1 and scope 2 requirements were narrowed to the point a company might not need to disclose them at all.
As a result of the wriggle room, “companies can be expected to take advantage of the discretion the SEC affords them”, Satyam Khanna, a former SEC official who worked on these climate rules, told me.
Erik Mohn, a vice-president for sustainability at French energy management company Schneider Electric, agreed. Reporting on different numbers and different metrics depending on who the audience is “creates confusion”, he told me.
“It is a little bit unfortunate that we do have this relaxed lens” from the SEC, he said.
If Trump wins
At the same time as the SEC adopted its climate rule on Wednesday, Nikki Haley suspended her White House campaign, all but assuring Donald Trump will get a third shot as the Republican presidential nominee. The election is eight months away, but already people are speculating about what will happen to the climate rule afterwards.
Environmental groups on Wednesday said the watered-down climate rule should be the SEC’s first step towards tougher reporting requirements. They were disappointed in the final product, but said scope 3 emissions and other provisions left on the cutting room floor should be resurrected. If Biden is reelected, this notion may be borne out.
But if Trump wins the White House, dismantling this rule will surely be a top priority for his appointee as SEC chair. In his first term in office, Trump quickly pulled the US out of the Paris agreement. There is no sign that he’s had a change of heart on climate during his time away from the White House. (Patrick Temple-West)
GOVERNMENT POLICY
UK Budget fails to make a splash on green spending
Wednesday’s UK Budget was relatively cautious stuff — at least compared with one notorious recent example — and it certainly didn’t deliver the radical boost for green investment that some have called for.
Chancellor Jeremy Hunt did not ignore the energy transition altogether. He announced a record £1bn ($1.3bn) allocation for government renewable energy support at this year’s auction — four times last year’s sum. He dished out an extra £120mn for the government’s Green Industries Growth Accelerator, which is intended to bolster supply chains for offshore wind and carbon capture development. And he extended a windfall tax on North Sea oil and gas producers by one year, to 2029.
Despite these moves, this Budget will look to many green-minded observers like a missed opportunity. Hunt could have made a permanent increase to the state’s share of revenues from offshore oil production, which is considerably lower than in many other oil-producing nations, as Greenpeace pointed out this week.
Hunt made an eye-catching move on aviation, imposing a hike in air passenger duty for business and first-class tickets. A better idea, according to this interesting paper from the New Economics Foundation, would be to impose a progressive frequent flyer tax, which would do more to shift behaviour away from carbon-belching air travel. Meanwhile, Hunt extended a freeze in fuel duty — a move that will be welcomed by many drivers, but will cost the government £5bn while slowing the UK’s transition to clean road transport.
As Martin Wolf wrote in his column earlier this week, climate change was effectively “ignored” as a strategic priority in this Budget. The UK’s national Climate Change Committee has written persuasively about the need to develop the skills to drive a thriving low-carbon economy, and to improve energy efficiency in buildings. But these topics went unmentioned by Hunt on Wednesday.
Academics at the London School of Economics argue that a fundamental change in economic strategy is needed to achieve the twin goals of greening the UK economy and driving long-term growth. In this paper last month, they called on the government to borrow more to fund a major increase in public investment — worth 1 per cent of gross domestic product, or £26bn — focused largely on low-carbon infrastructure and innovation.
This proposal jibes with Labour’s once totemic pledge to spend £28bn a year on green investment, which it abandoned last month, citing higher interest rates and the Conservative government’s mishandling of the national finances. The LSE paper argues that such a plan is still viable — and that the bond market will support the borrowing required. If Labour leader Sir Keir Starmer wins office this year as polls suggest, he will need to consider the merits of this argument — and his decision will have big implications for investors in the UK energy transition. (Simon Mundy)
Smart reads
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The Taskforce on Social Factors, set up by the UK government to look at social risks and impacts that pension fund trustees should consider, published its final report yesterday. It’s a useful guide to these issues, whether or not you’re in the pensions sector.
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If US companies and government bodies really want to support minority-owned businesses, they need to start awarding them more contracts, argues the Brookings Institution’s Bibi Hidalgo.
Read the full article here