Latest SEC and FCA ESG update - Carbon Responsible
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Latest SEC and FCA ESG update

We've seen plenty of policy updates unfold this year already and if you're not a carbon accounting expert, it's overwhelming.

James from Carbon Responsible's Team

James Clarke

Carbon Accounting Specialist

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In light of the recent UK and US ESG regulation updates, our in-house Policy Expert James has itemised the key things our clients need to be aware of.

The SEC Adopts Rules on Green House Gas Reporting 

On 6th March 2024, the U.S. Securities and Exchange Commission (SEC) made a significant move towards greater transparency and accountability in corporate environmental practices by requiring public companies to report a portion of their greenhouse gas emissions.  

🔍 Report Inclusions & Omissions: The adopted rules focus on Scope 1 and Scope 2 emissions, crucial steps but fall short by omitting Scope 3 emissions—neglecting aspects like supply chain and customer use of sold products and services.  

🏢 Private Companies Exempt: It’s important to note that these regulations apply specifically to public companies, leaving private companies exempt. The diverse reactions from industry giants like Amazon and Ralph Lauren, supporting Scope 3 disclosures, versus Walmart and BlackRock, opposing due to accuracy concerns, highlight the complexities within the business landscape. 

🌍 Global Perspective: The USA still lags behind other jurisdictions and near peers in terms of mandatory greenhouse gas reporting maturity. Although the SEC’s adopted rules might not be as comprehensive as initially proposed, they indicate a positive trajectory. 

📈 Future Steps: Looking ahead, the incorporation of Scope 3 into mandatory reporting seems inevitable. This evolution presents an opportunity for companies to enhance their climate risk disclosures, aligning with frameworks like Task Force on Climate-Related Financial Disclosures (TCFD). 

💡 The Road to Transparency: While challenges persist, these regulatory steps underscore a collective acknowledgment of the urgent need for transparent reporting on environmental impacts.  

Techcrunch have written this article which sets the scene well. 

Similarly on March 6th 2024, the UK Chancellor of the Exchequer announced the Spring Budget which included  potential for regulation of ESG ratings.

ESG factors have emerged as pivotal in the financial markets, shaping investment decisions and capital allocation. In the UK, nearly half of the £10 trillion assets under management in 2021 integrated ESG considerations, and this momentum is projected to soar globally, reaching $33.9 trillion by 2026.

We’re pleased to see increasing importance being placed on ESG regulation and deduce the following from the Spring Budget.

🌍 Driving Forces Behind ESG Surge: Consumer demand for sustainable financial products is a driving force, signalling a shift towards conscious investing. As ESG factors gain prominence, services like ESG ratings become instrumental, influencing investment choices by evaluating environmental, social, and governance characteristics. 

🛑 Rationale for Regulation: While ESG ratings cover risks, opportunities, and broader impacts, concerns have arisen about their opacity, leading to confusion. In 2020, 65% of institutional investors used ESG ratings weekly, underscoring their growing influence. Recognising potential harm areas, the FCA advocates regulatory oversight to address issues like transparency, governance, and conflicts of interest. 

🌐 Global Initiatives for Responsible Finance: Internationally, bodies like International Organization of Securities Commissions (IOSCO) and the Organisation for Economic Co-operation  and Development (OECD) emphasize increased attention to ESG ratings. The European Securities and Markets Authority (ESMA), Japan’s Financial Services Agency (FSA), and the Securities Board of India (SEBI) are actively exploring regulatory frameworks. The Treasury acknowledges the need for improved transparency and governance, recognising the benefits of regulation in raising trust and supporting the transition to a net-zero economy. 

🤝 Consultation and Collaboration: The Treasury seeks views on ensuring a proportionate but effective regulatory scope in the UK, emphasizing the importance of engaging stakeholders in shaping regulations. The proposed consultation focuses specifically on ESG ratings, excluding less processed ESG data from the regulatory scope. 

🌿 Looking Ahead: The FCA has indicated their regulatory approach would take the main elements of IOSCO’s recommendations as a starting point (see below).

Figure showing IOSCO's recommended key regulatory outcomes

If you’re struggling to adopt these unfolding regulations, we encourage you to reach  out to our team who will be happy to talk you through these updates and how you should prepare.

Give us a call on 020 8712 1162 or email info@carbonresponsible.com

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