How the SEC’s Climate Disclosure Rules Could Impact Private Markets

Lily   29 March, 2022

What is the SEC's Climate Proposal?

On the 21st March 2022, the US Securities and Exchange Commission (SEC) approved a long-awaited climate-related disclosures proposal for public listed companies. The proposal would require registrants to disclose:

  • Scope 1 and 2 GHG emissions
  • Indirect emissions from upstream and downstream activities (Scope 3), if material
  • Oversight and governance of climate-related risks
  • How any climate-related risks identified by the registrant have had or are likely to have a material impact on the business
  • How any identified climate-related risks have affected or are likely to affect the registrant’s strategy, business model and outlook
  • The process for identifying, assessing, and managing climate-related risks and whether any such processes are integrated into the registrant’s overall risk management process
  • Whether a transition plan has been adopted as part of the overall climate-related risk management
  • Whether scenario analysis is used to assess the resilience of the registrant’s business strategy
  • Whether internal carbon pricing is used and if so, information about the price
  • The impact of climate-related events and transition activities on the line items of a registrant’s consolidated financial statements
  • The registrant’s climate-related targets or goals and transition plan, if any

How Could it Impact Private Markets?

Though the SEC regulates public companies, these new rules could still impact private markets.

Firstly, the proposed disclosures include a company’s indirect emissions from upstream and downstream activities. This would effectively mean that private companies which sell products or services to public companies will need to produce GHG emissions data on request. In many cases, small and medium-sized enterprises are unlikely to have the in-house capabilities to report on their ESG performance and so we may see greater reliance on outsourcing.

Secondly, the proposal does not include any incremental phase-in allowance for newly public companies. This will place more pressure on private companies to ‘get their house in order’ before entering public markets. In some cases, it could even encourage companies to delay plans to go public in favour of the regulatory haven that private markets provide.

Finally, these new rules may drive market expectations to include the same level of disclosure for private companies.

Next steps

The climate proposal will remain open to public comments, which may see its scope curtailed. Nonetheless, it is clear that once finalised, these new disclosure rules will place greater pressure on both public and private companies to ensure better gathering of data and intelligence on their climate-related risks and opportunities.

ESG for unlisted companies

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