The Proposed SEC Climate Disclosure Rules: An Opportunity for USAID’s Climate Strategy

April 19, 2022

On March 21, the U.S. Securities and Exchange Commission (SEC) shared a wide-ranging set of rules that—if approved as proposed—would require publicly traded U.S. companies under its supervision to provide climate-related disclosures in their periodic reports. So far, the vast majority of the U.S. investment and banking community have voiced support for these rules amid ample and growing evidence that climate change represents an increasing risk to the private sector worldwide.

The timing is also opportune: The latest report from the United Nations’ Intergovernmental Panel on Climate Change (IPCC) warns of impending dangers of human-induced climate change. It also details how current mitigation efforts will fall short to curb warming below 1.5 C, and how current adaptation investments will fail to adequately prepare for climate-related challenges, particularly in emerging markets.

The new SEC rules offer the U.S. Agency for International Development (USAID) an exceptional —but brief—opportunity to advance its Climate Strategy by supporting the U.S. private sector’s efforts to adopt SEC rules, augment their positive impact, and minimize any unintended negative consequences in emerging markets.

Under Proposed SEC Rules, Companies Would Report Climate-related Risks …

The SEC rules will require U.S. companies to regularly provide reliable, comparable, and actionable information about climate-related risks that may have a material impact on their business. This will replace many companies’ voluntary sustainability reports, which often include oversimplified, handpicked metrics and are rarely independently verified. The rules will also compel companies to design risk management and governance systems to track climate-related risks across their operations. If the rules are implemented as planned, the SEC will ensure that investors account for climate-related risks in their pricing of companies, thus reducing systemic economic risks derived from climate change, and protecting the overall health of the financial system.

The SEC rules focus on two types of disclosures: a) climate-related risks, including physical climate risks like flooding or shifts in climate patterns, and fuel transition risks such as new regulations or changes in market demand; and b) the disclosure of several greenhouse gas (GHG) emissions, including carbon dioxide and methane. The rules are similar to those adopted by 30-plus countries with over $23.3 trillion in GDP that require corporate climate-related risk disclosures. They build on the same climate disclosure framework for corporate reporting used by the European Union, United Kingdom, Switzerland, and Japan.

… But These Rules May Have Unwanted Effects in Emerging Markets.

Although these rules are a strong net positive, they will generate additional costs to U.S. companies and may have unintended ripple effects across emerging markets. The additional corporate costs include not only new reporting expenses, but also increased litigation risks (if these climate disclosures are found to be misleading, deceptive, or incomplete), as well as the costs required to adjust corporate operations, investment portfolios, and supply chains to mitigate material climate risks and/or to reduce measurement costs.

In many cases, investments to reduce climate-related risks are projected to generate positive financial returns. However, the changes to private sector operations and supply chains may have a disproportionate impact on suppliers and local communities in emerging markets, including:

Some companies may decide to write off and walk away from assets, investments, and suppliers that are estimated to be unprofitable after accounting for projected climate-related costs. Emerging markets are overwhelmingly exposed and vulnerable to climate risks and therefore may experience a significant decrease in private sector activity. This may constrain the ability of local communities and the public sector —which perversely may further accelerate the outgoing flow of business in a vicious cycle. In some cases, public sector stakeholders and local communities may even have to spend significant resources to clean up those “stranded assets.”
Other companies may conclude these assets, investments, and supply chains remain profitable after accounting for climate-related risks, but that the reporting costs are too onerous. This trend may be particularly relevant to very polluting assets (e.g., those in apparel manufacturers and chemical input suppliers) and to highly disaggregated supply chains where reporting costs are higher (e.g., agriculture and fisheries suppliers). Companies may transfer ownership of these profitable but polluting assets or investments to privately owned, more opaque entities that do not face such reporting pressures. These opaque entities may also relocate to jurisdictions with more lenient reporting requirements, often found in emerging markets—potentially leading to an uptick in highly polluting activities there. Additionally, small producers such as farmers or fishers that feed into disaggregated local supply chains may also see a significant drop in demand from U.S. buyers, unless they can improve their ability to verifiably measure their exposure to climate risks and their GHG emissions.

SEC Rules Are Also an Opportunity to Advance USAID’s Climate Strategy

Addressing climate change in emerging markets is a top priority for USAID. The Agency’s draft Climate Strategy—with its goal to mobilize $150 billion in public and private finance for climate by 2030—positions USAID to advance equitable and ambitious actions with the private sector to confront the climate crisis at scale.

Many U.S. companies are already keenly aware of climate change risks to their bottom lines and are responding by making significant changes to their strategies, governance, risk management, and operations. The SEC estimates nearly a third of its corporate annual reports already include climate-related disclosures. USAID and its international development partners can play a pivotal role in helping U.S. companies adopt SEC rules, while advancing its own Climate Strategy. We have detailed some options below.

1. Partner with U.S. companies and their suppliers to help align with SEC rules, including supporting:

Local implementation of systems to measure and track climate-related risks and GHG emissions.
Capacity building for suppliers to measure and report on their climate-related risks and GHG emissions, especially in disaggregated supply chains.
The development and implementation of transition and adaptation plans to reduce climate-related risks and GHG emissions (e.g., improving resilience to climate shocks, increasing energy efficiency, and switching to low-carbon sources of energy).

2. Engage local third parties, such as financial, engineering, consulting, or audit firms, to develop and offer:

Ancillary services to support U.S. companies verify and, where necessary, reduce climate-related risks and GHG emissions
Technical solutions to partially or fully automate tracking and measurement of climate-related risks and GHG emissions.
Climate-linked investment products that promote lower climate risks by offering improved investment terms.

3. Leverage partnerships with the public sector to support the development of climate-resilient enabling environments for the private sector, aligned with Nationally Determined Contributions towards climate change mitigation set out in the 2015 Paris Agreement. This can include:

Upgrading local modeling of physical climate-related risks, which can help identify business activities at highest risk, and drive long-term area-based and landscape-based adaptation private sector planning.
Exploring public-private partnerships and public procurement mechanisms to accelerate the provision of green infrastructure and nature-based solutions to reduce physical climate risks to regional private sector partners.
Driving national policy and regulatory reform to adopt climate-friendly legal regulations, including corporate and finance climate-disclosures, and removing any barriers and support private investments in sustainable and climate-friendly businesses.

USAID has a Short Time to Act on this Opportunity

The SEC’s new rules create an opportunity for USAID to advance its Climate Strategy in partnership with the private sector. This window will likely start to close in 2024. This timeline is driven by the SEC’s own proposed implementation deadlines, expected to be confirmed by the end of 2022. By that time, all large U.S. companies under SEC supervision will need to have in place risk management systems and processes to measure and report on their climate-related risks and GHG emissions. These systems must be operational by 2023, so that all climate-related risk reports covering 2023 results can be audited and included in SEC annual filings in 2024 (smaller U.S. publicly traded companies have been granted a longer period to implement these rules).

By the end of 2024, most large U.S. companies are expected to have fully tried-and-tested climate-risk systems in place across their operations globally. Until then, they will need all the support that they can get to measure climate related-risks and GHG emissions, and to adjust their operations and supply chains in emerging markets. Thanks to these new SEC rules, USAID has an exceptional- albeit short- opportunity to make a truly long-lasting impact and develop more resilient and inclusive private sector operations and supply chains in emerging markets.