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Jan 30, 2023

Management teams unprepared for SEC’s upcoming ESG rule

ESG disclosures still significant factor in investment decisions

Management teams feel unprepared for the upcoming SEC rule on climate-related disclosures, according to a new survey by ICR.

Nearly eight in 10 management teams (78 percent) express concerns about reporting ESG-related risks and strategies because of the forthcoming SEC ruling on climate disclosures.

If approved, the new rule would require companies to disclose information about their governance of climate-related risks and how these have had, or are likely to have, a material impact on their business.

While the industry still waits to understand the final scope of the rule and its approval, ESG disclosures remain a highly influencing factor in investment decisions.

The ICR survey, conducted at the latest ICR Conference in January 2023, collates responses from management teams, institutional investors, sell-side research analysts, investment bankers and private equity professionals.

It finds that 73 percent of management teams incorporate ESG-related information into corporate announcements. It also reveals that a majority (65 percent) of non-management teams believe companies’ ESG disclosures are ‘sometimes helpful’ in making investment decisions. This compares with a lower 7 percent that always factor ESG disclosures into their investment decisions and 28 percent that deem such disclosures never helpful.

Investment community unprepared for SEC’s upcoming ESG rule
Lyndon Park, ICR 

‘Despite the recent raft of anti-ESG regulations and pressures, ESG factors are here to stay,’ says Lyndon Park, managing partner for global ESG advisory and shareholder activism at ICR.

In an interview with IR Magazine, he explains: ‘There are tangible reasons why 78 percent of the survey respondents feel unprepared for the SEC’s forthcoming climate rule, one of which is that the SEC published its proposed rules very early, pushing aggressively for TCFD-based disclosure, including Scope 3 emissions information, which is difficult to account for or control, as it lies outside the Scope 1 and Scope 2 emissions within operational control of the companies.’

Park says another reason is linked to the SEC’s delay in finalizing its ruling by the end of 2022, as it said it would.

‘In addition to this uncertainty, many issuers and investors have focused their ESG efforts based on ‘materiality’ as companies, especially smaller and recently public [ones], have focused their initial [ESG] efforts on ESG factors that are business-relevant and material, often based on the SASB framework that investors have coalesced around,’ he adds.

Park says there is still a way for companies to get ready ahead of the SEC’s final ruling on the matter. The first step is to start collecting Scope 1 and Scope 2 emissions data, crafting a strategy and establishing achievable goals in line with the TCFD framework.

He explains: ‘Intellectual honesty is a must, so rather than speculatively setting Scope 3 targets based on incomplete information or data that’s out of their control, companies can begin the assessment work related to Scope 1 and Scope 2 emissions. Companies would be best served to start from there.’