SEC’s ESG & Climate Announcements Will Drive A Big Uptick In ESGtech Spend From 2022
On March 15, the acting chair of the US Securities and Exchange Commission (SEC), Allison Herren Lee, set out her agenda for climate change and ESG information in a speech to the Center for American Progress. The big news? The acting chair of the SEC made it clear that climate and ESG are core to the mission of the regulator. Given this view, the agency is undertaking a holistic review of the relationship between their regulatory framework and the climate and ESG agenda. The SEC does not consider that voluntary reporting based on frameworks like GRI, SASB and TCFD is delivering the investment-grade, material information that financial markets need to correctly price risk and allocate capital. During 2021 the SEC is developing a mandatory ‘comprehensive ESG disclosure framework’ which is intended to produce the ‘consistent, comparable, and reliable data that investors need’. No date was offered for when this will be produced but the second half of 2021 is likely.
What can market participants expect? The SEC is focusing on ESG disclosures in the context of financial reporting – not creating a standalone ESG reporting framework. This means that what many sustainability advocates would like to see – a lift and shift of the SASB framework into the financial reporting realm – is very unlikely. That would be too broad. It would be too much too soon for the vast majority of issuers. Instead, publicly traded firms will need to disclose information relating to a tightly-defined set of ESG metrics applicable across all industries which have a material impact on risk to investors and lenders. This will likely combine qualitative statements being incorporated in financial filings about ESG risk assessments, systems and controls as well as quantitative disclosures on metrics which map to value at risk. This will create a high volume of demand for investments in ESG risk management systems design, internal controls, disclosure management processes and assurance of ESG data. Good news for ESG and sustainability risk advisors at firms like EY and Willis Towers Watson. Next gen ESGtech vendors like Diginex Solutions, Emex and Novisto are also well-positioned to benefit from this move. Likewise, it is positive news for ESG ratings providers like Morningstar and MSCI. The SEC will nudge all issuers into the ESG swimming pool – even if in 2022 this will still be at the shallow end. So the ESG ratings providers will get a comprehensive baseline of ESG data for thousands of listed entities.
Before the SEC’s mandatory climate and ESG disclosure framework is launched, the agency is also initiating more tactical work to understand the current state of corporate reporting. This involves a review of public companies’ climate disclosures based on the SEC’s 2010 guidance and a request for comment on climate disclosure practices. Neither of these activities will require spending on ESGtech and services in 2021. By contrast, 2021 should see a boost in spending on the assurance of processes, controls and systems for ESG and climate reporting. Why? Earlier in March, the SEC’s Division of Enforcement created a Climate and ESG Task Force. Their mission is to ‘proactively detect climate and ESG-related misconduct’ with a specific focus on ‘material gaps and misstatements in issuers’ disclosure of climate risks under existing rules’. Enforcement actions targeting ‘ESGwash’ will be the key determinant of increased demand in the short-term.