What the SEC climate-disclosure rule means for institutional investors – GWC Mag

Last week, the Securities and Exchange Commission voted to mandate that public companies disclose climate-related emissions and risks to provide more transparency for current and prospective investors. An important note: Only risks defined as “material” have to be reported, and only companies already disclosing climate-related risks and emissions must continue to do so. 

Institutional investors — companies or organizations that will invest on behalf of others — were one of the main catalysts to the SEC’s original drafting of the rule. 

“When we were crafting the proposal the really common theme from the investor community was that they want a consistent, comparable decision that provides useful information about companies’ climate-related financial risks,” said Kristina Wyatt, chief sustainability officer at Persefoni and one expert tapped to draft the original iteration of the SEC rule. “That included consistent information about companies’ full scope of emissions.”

According to the Workiva 2024 Executive Benchmark on Integrated Reporting, 88 percent of institutional investors are more likely to invest in companies that integrate financial and ESG data. 

“Investors must be vocal in the protection of [the SEC rule] and continue to advocate for further disclosure,” said Thomas P. DiNapoli, New York state comptroller and sole trustee of New York State Common Retirement Fund, in a statement, “like the disclosure of ‘scope 3 emissions,’ which can further improve efforts to measure and address climate-related investment risks.”

Why is this important?

Institutional investors wanted greater transparency from public companies to inform their decision-making. Now that the SEC has decreased the scope of disclosures mandated from those companies, institutional investors need to know how to proceed in this new ecosystem. 

For instance, because companies have discretion to define material risk, more of the reporting will be subjective. 

“[A company] could decide whether emissions are material if investors need to know about them to understand whether the company has made progress towards its decarbonization targets or transition plan,” said Anissa Vasquez, sustainability director at Persefoni during a webinar detailing how companies and investors should proceed with the new SEC rule.

While Scope 3 emissions were not mentioned in the SEC ruling, it’s likely that institutional investors still want that information.

“The people with the capital still want [Scope 3 emissions data]; we can’t ignore that,” said Allison Herren Lee, former SEC chair, during the same webinar.

How to move forward?

First, it’s important to familiarize yourself with the implementation timeline. Mandates for Scope 1 and 2 emissions reporting will begin in fiscal year 2028, due in 2029. Material risks reported in financial statements begin for FY2025, due in 2026.

In addition to the SEC rules, companies will also have to comply with the EU’s Corporate Sustainability Reporting Directive disclosure requirements and California’s state climate disclosure laws, among others.

“For institutional investors, they’re going to want to think about what they are subject to…because the SEC is not the only place where companies are going to be reporting,” said Wyatt. “It’s a collage of different reporting standards that all come together.”

With multiple disclosure standards, investors also need to closely monitor how companies define their material risk. 

In the webinar, Steve Soter, vice president and industry professional at Workiva, advised investors to vigilantly track how companies are reporting material climate risks. Institutional investors should compare how companies define risks on their SEC filings and their financial statements, ensuring that both align. 

“Connect the dots,” said Soter.