On March 6th 2024, the United States Securities and Exchange Commission (SEC) released its highly anticipated climate-related disclosure rules for public US companies.
Originally published in March 2022, the SEC proposed that all publicly listed US companies be mandated to report their climate data in alignment with reporting recommendations from the Taskforce on Climate-related Financial Disclosures (TCFD).
When the proposal was then opened for public comment, the SEC received over 3,400 letters, significantly more than it customarily does when seeking public input.
While the SEC ruling applies to public companies, given the current global regulatory environment and calls for greater scrutiny of ESG claims within the private equity industry, it is only a matter of time before similar climate considerations be asked of private funds. Moreover, although the proposal will almost certainly face some measure of legal challenges, this will likely not deter 98% of companies from implementing climate reporting, according to a PricewaterhouseCoopers survey of 300 senior executives at US public companies with at least $500 million in revenues.
The SEC’s final climate disclosure rule (i.e. the Final Rule) aims to provide investors with consistent and comparable information with which to examine the sustainability and climate risk profile of potential investments. It is also wide-ranging, covering the disclosure of greenhouse gas (GHG) emissions, predicted climate risks, and sustainability transition plans. Some if its main disclosure provisions include:
Companies have a phased-in period to comply with the Final Rule, and the deadline depends on: 1) their filing status (i.e. whether they are an LAF, AF, a Non-Accelerated Filer (NAF), Smaller Reporting Company (SRC), or an Emerging Growth Company (EGC)) and 2) the content of their disclosure. In general, LAFs have the shortest time window to comply with the Rule, followed by AFs, and then SRCs, NAFs, and EGCs.
The Final Rules will become effective 60 days after publication in the Federal Register.
Though the SEC proposal applies to public markets, there are three potential avenues for direct overlap with private markets:
Critically, in contrast to public markets, private equity and venture capital markets have direct responsibility for the companies or start-ups they invest in, often holding board seats in these companies. This direct-stakes approach to raising capital, along with the responsibility to their own board members who typically have considerable wealth at risk, means private capital firms will be held to a far higher standard of accountability as ESG regulation continues to tighten worldwide. Venture capital firms, in particular, have an opportunity to integrate ESG into their portfolio companies from the get-go during the early stage of a company’s life cycle.
Given the unique nature of private equity to position itself as an ESG leader, the following areas may be considered when formulating a climate accounting strategy:
If you are a Private Equity firm that is also an RIA, further planning and consideration may be required when formulating your climate accounting strategy since an additional specific set of disclosure requirements will apply. In this case, you can prepare for the upcoming SEC disclosure mandate by:
Technology will play a paramount role in successful ESG compliance – a belief echoed by a majority of business leaders.
Keeping the needs of private capital investors in mind, ESGTree has developed several climate reporting tools to collect, analyze, and automate this data and simplify reporting.
These include:
The SEC’s climate disclosure rules do not exist in a vacuum. As more regulators across the world toughen ESG rules, consolidate standards and crack down on greenwashing, the private equity industry is well-placed to lead the transition to a more sustainable, low-carbon economy.
For more information on the Final U.S. Securities and Exchange Commission (SEC) Climate Disclosure Rules, click here to download the official SEC Rules Document.
ESGTree provides powerful cloud-based data solutions to help private equity (PE) and venture capital (VC) firms gather, collect, analyze, benchmark and report their ESG data and that of their portfolio companies. Our carbon calculator, customizable and automated ESG frameworks, multi-level report viewing, trends analysis dashboard, and other features turn ESG into a value creation tool rather than a reporting burden.
Canada: ESGTree, CPA 4th Floor, 140 West mount Rd N, Waterloo,
ON N2L 3G6, Canada
United Kingdom: ESGTree, 33 Queen Street, London EC4R 1AP, United Kingdom
