Every year, the Securities and Exchange Commission (SEC) releases its Unified Agenda of Regulatory and Deregulatory Actions, also known as the Reg Flex agenda. This semi-annual SEC rulemaking agenda is published by the Office of Information and Regulatory Affairs (OIRA) and outlines the regulatory actions the SEC plans to prioritize and implement over the next six months.
On January 4, 2023, the SEC released the Fall 2022 Reg Flex agenda, listing 16 rules scheduled for finalization in spring 2023, along with eight additional rules to be finalized in fall 2023.
Naturally, these proposed and final rules cover an array of regulatory and deregulatory actions, ranging from digital assets and blockchain technology to cybersecurity and data privacy. Here, we’ll focus on two specific rules that pertain to business sustainability.
Existing ESG rules
Environmental, social, and governance (ESG) tenants remain a top priority for the SEC. In recent years, they have published several ESG-related rules, including:
- Release 33-9106: Guidance on ESG Disclosures (2010) – Guidelines for how companies should cover ESG factors within their corporate sustainability reporting and disclosures, encouraging businesses to disclose material risks and opportunities to stakeholders.
- Disclosure of Payments by Resource Extraction Issuers (2012) – Compel resource extractors to detail the specific types of payments made to support the commercial development of oil, natural gas, or minerals.
- Conflict Minerals Rule (2012) – Require companies to disclose whether their products contain minerals—specifically, tin, tantalum, tungsten, and gold—mined in the Democratic Republic of Congo via forced labor.
- Modernization of Regulation S-K (2020) – Amended Regulation S-K to force companies to disclose human capital management and digital engagement practices and their use of ESG factors in business operations and strategy.
Proposed sustainability rules and amendments on the agenda
ESG initiatives will once again be a key focus in the upcoming regulatory agenda, with the Securities and Exchange Commission (SEC) proposing new rules as well as potential rule amendments that were mentioned earlier.
Two, in particular, are worthy of note:
Climate change disclosure
Rule No. 33-11042—the Enhancement and Standardization of Climate-Related Disclosures for Investors—is an amendment to the 2010 Release 33-9106, which provided guidance to public companies and special purpose acquisition companies regarding disclosure requirements.
This new disclosure rule would require SEC registrants to include certain climate-related information in their registration statements, annual reports, and other filings about climate-related risks that are “reasonably likely” to have a material impact on their business, operations, or financial condition. Some of the information they would be expected to disclose includes:
- How climate-related risks impact (or could impact) the registrant’s business, strategy, and outlook over short-, medium-, or long-term periods.
- The process a company uses to identify, assess, and manage climate-related risks and whether those are integrated into overall risk management systems.
- How a company performs governance of climate-related risks and integrates this into relevant risk management processes.
- Climate-related targets and goals.
- Transition plan involved in the climate-related risk management strategy.
- Impact of climate-related events and transition activities on consolidated financial statements, including estimates and assumptions.
- Disclosure of the registrant’s direct GHG emissions (scope 1) and indirect GHG emissions from purchased electricity and other forms of energy (scope 2).
- Disclosure of indirect emissions from upstream and downstream activities in the registrant’s value chain (scope 3), if material, or if the registrant has set a GHG emissions target or goal that includes scope 3 emissions.
What the SEC Regulatory Agenda could mean for businesses
These proposed rules would have a phase-in period for all registrants—the specific compliance date would depend on the registrant’s filing status—and an additional phase-in period for scope 3 emissions disclosures, which are more difficult to track. It’s worth noting that there’s talk of the scope 3 requirements being dropped. However, gathering better data on scope 3 emissions sources will become easier as data coverage increases.
Regardless, for businesses, now’s the time to conduct scenario analysis, develop transition plans, and start setting climate-related targets and goals. For that, embracing an integrated reporting model could help prepare your organization for when the disclosure rule comes into effect.
ESG “names rule”
While the SEC already has a rule about materially deceptive or misleading fund names, over the past decade, there’s been a spate of fund names that imply the fund is ESG-focused when ESG is only a small component of the overall portfolio allocation.
This new rule is meant to combat “greenwashing” by requiring funds to have 80% of their investment focused on whatever the name of the fund suggests, whether that was for an “ESG” fund or a “growth” fund.
Under this rule, the SEC would divide ESG funds into three unique categories:
- Integration – Funds that integrate ESG factors as well as non-ESG factors but do not prioritize ESG factors in investment strategy.
- Impact – Funds that seek to achieve a specific ESG impact. These types of funds are expected to disclose details and metrics on how they would measure progress toward that desired impact.
- Focus – Funds that focus the portfolio on one or more ESG factors, and those factors are a guiding focus in the overall investment strategy.
What the ESG names rule could mean for businesses
For fund managers, now is the time to transition portfolios into compliance or change the name of the portfolio to be more accurate. By preparing now, you can make the necessary adjustments without harming shareholders’ portfolio performance.
Challenges and opportunities for the SEC in 2023
The SEC climate disclosure rule came under fire during the public comment period, which left some experts speculating whether or not the law will be pushed through by the Spring of 2023.
Many business leaders across various industries echoed this sentiment, claiming that some disclosure statements were overly burdensome. Several banking groups requested that the SEC “narrow the proposal’s scope, and to let any guidance by bank regulators preempt rules written by the SEC.”
The courts also have pushed back against such rules. In West Virginia v. EPA, the Supreme Court recently ruled that the EPA lacked the constitutional authority to regulate greenhouse gas emissions. Any such regulations could be blocked unless explicitly authorized by Congress.
Next steps for organizations
Although there are legal challenges and disagreements regarding the proposed rule changes, it’s more likely a matter of when they will be implemented, rather than if.
Regulatory compliance is only a piece of the puzzle. Businesses should continue to improve on their inventory methodology—such as identifying value-accretive opportunities in their operations—to stay ahead of the curve. Investors and non-investors alike should make preparations now, so they will be ready when future rule changes come into effect. Sustain. Life’s ESG reporting software can streamline the whole process.
If you need help with that, Sustain.Life is the ultimate ESG-compliance solution. Our sustainability management software helps you measure, manage, and report your sustainability initiatives as you move toward net-zero.
Sources
1. SEC, “Agency Rule List – Fall 2022,” https://www.reginfo.gov/public/do/ Accessed March 21, 2023
2. CPA Journal, “An Overview of the SEC’s Proposed Climate-Related Disclosures,” https://www.cpajournal.com/2022/10/24/an-overview-of-the-secs-proposed-climate-related-disclosures/ Accessed March 21, 2023
3. HK Law, “SEC ESG-Rulemaking Wave Continues with Proposed Rule for Advisers and Funds,” https://www.hklaw.com/en/insights/publications/2022/06/sec-esg-rulemaking-wave-continues-with-proposed-rule Accessed March 21, 2023
4. American Banker, “Banks Push Back Against SEC’s Proposed Climate Risk Disclosure Rules,” https://www.americanbanker.com/news/banks-push-back-against-secs-proposed-climate-risk-disclosure-rules Accessed March 21, 2023
