But its overall purpose and structure provides an indication of where the regulator is heading. Financial market players and listed companies under the auspices of the SEC should have already seen enough by now to take action in preparation for some form of mandated climate-related disclosure.

The 510-page proposal builds upon the framework provided by the Mark Carney-backed Task Force on Climate-Related Financial Disclosures (TCFD) with some additions. Details on climate-risks are to be provided including:

• Oversight at board and executive level
• Short, medium, and long-term risks identified to the filer’s business and financial position
• Present or likely risks to the filer’s strategy, business model or outlook
  

Also required are descriptions of how risks identified above are managed by the filing company:

• Methods for identifying, assessing and managing climate risks and whether these are embedded in centralised risk frameworks
• Whether the filer has a transition plan for a lower-carbon economy or an increase in climate regulation — and the metrics and targets to find and manage physical and transition risks
• Whether the filer uses scenario analysis — and the parameters, assumptions and predicted financial impacts
• Whether the filer uses an internal carbon price, as well as its value and method for deciding it
  

The most significant points of the proposal are those to do with key targets and metrics related to carbon emissions.

Some of these requirements move beyond TCFD reporting in their stringency or detail, and include:

• Scope 1 and 2 emissions and emissions intensity
• Auditing of scope 1 and 2 emissions for ‘large filers’ with a $700m float or higher
• Scope 3 emissions if material and if included in targets
• Climate-related targets including; activities included, time horizon, methods to fulfil, if offsets or renewable energy certificates (RECs) are to be used:
  - Significant details of offsets and RECs used include the amount generated or offset, project details, locations and sources, and accreditations

Forcing public companies to publish their scope 1 and 2 emissions is a big shift, despite many companies already doing so. Around a quarter of the largest companies do not disclose their Scope 1 and 2 emissions, and the figure is worse for firms outside the largest 200. Large filers ($700m float or above) will need to have scope 1 and 2 figures audited, meaning investors can be confident that what is reported is accurate.

Scope 3 emissions are often neglected, with 40% of the largest companies not including them in disclosures, but they make up the bulk of emissions for many industries. Despite the SEC allowing a ‘safe harbour’ for Scope 3 emissions figures to be estimated, the disclosure requirement will be valuable for investors. The SEC requires reporting Scope 3 emissions by SEC filers only ‘if material’.

There has already been debate on whether this will lead to lots of Scope 3 reporting, or hardly any, with the looming prospect of legal challenges to the proposal based on claims of the immateriality of climate-related disclosure. 16 state attorneys in the US have already sent a letter to the SEC stating that they will fight the proposal through the rule-making process and in court if necessary. However the increasing importance of climate information both for public policy and for investors as they attempt to demonstrate to society that they are responsible, may be enough to prove that such disclosures are material for shareholders.

The European Union Corporate Sustainability Reporting Directive (CSRD) climate disclosures prototype, which will define how EU companies report emissions, calls for reporting Scope 3 emissions estimates based on significant categories. These are to cover at least ~80% of the company's total scope 3 emissions, with an explanation for any excluded categories.

One of the most anticipated requirements in the SEC proposal is the definition of carbon reduction targets, and whether filing companies will rely on offsets or purchased green energy for these.

One of the key differences between carbon neutrality and carbon net zero is that a carbon neutral company can rely completely on offsets to counterpoise its emissions footprint while a carbon net zero company will actively reduce its emissions as best it can and then offset what is left over. These terms are sometimes used interchangeably or are overlapping which makes the low-carbon transition claims by companies difficult to judge. The SEC proposal will shed light on this aspect of net zero claims and make benchmarking easier for investors.

What is also encouraging about the SEC proposal is not just the detail, but the facts that an important US regulator is finally taking a position on climate disclosures.

Europe has tended to lead the way on environmental disclosure rules with the UK Financial Conduct Authority requiring TCFD disclosures, and the EU Taxonomy and Sustainable Finance Action Plan increasingly engulfing parts of the financial markets.

While Europe introduced this climate-related legislation, the Trump Administration between 2017 and 2021 actively repealed a number of pro-environment laws while the President himself called climate change a ‘hoax’. With mixed signals from the largest markets, investors could not be sure how seriously to take climate change in the short term.

Now the US markets authority is giving the green light to climate-related disclosure, there is certainty about this topic as a legitimate area of concern. With the backing of serious institutions, company boards and executive teams can treat climate change with intent while preserving their professional integrity.

Despite coming into play in 2023 for the largest companies, the likelihood is that this proposal will kickstart activity for both companies and investors who will want to be prepared for whatever requirements are finally enacted. There may be changes made between the draft and formalised SEC rules, but the overall trend is clear — climate change is on the agenda.

So when can we expect to see private US companies included in a climate-related directive, bringing in more sponsor-backed firms who issued leveraged loans and HY bonds?

The SEC only regulates companies listed on stock exchanges and organisations involved in the sale and purchase of SEC-registered securities, including private fund advisors. Disclosure requirements for private companies tend to be under the jurisdiction of the state in which they are formed, making it more difficult to get consistent disclosure in the US than a single country like the UK or a single market like the European Union. However, there is potential for market participants to demand better disclosure from private companies after familiarising themselves with higher-quality information from listed borrowers or those with SEC-registered bonds.

Some US states with a strong position on climate action may also issue their own disclosure requirements. For example, California has already passed legislation which will enforce mandatory Scope 1, 2 and 3 emissions reporting on public and private companies earning over $1bn which operate in the State.

In April 2021, the EU adopted a proposal for a Corporate Sustainability Reporting Directive that would include large unlisted companies in its remit, to replace the current Non-financial Reporting Directive which was ratified in 2013. It took eight years for the pioneers of sustainable finance regulation to ensure certain unlisted companies begin to disclose in-line with publicly traded counterparts.

States like California include private and public companies in its new climate disclosure bill as a trade-off with naysayers who pushed to remove science-based target requirements before the bill passed.

How long it will take to define this as standard practice across global markets is uncertain, but for now a greater proportion of the 9fin universe is set to disclose more than we have seen previously. The 9fin platform is soon to have ESG data related to the most significant standards, guidance and regulation rolled out across the leveraged finance universe. For more information on this new offering use our online form here.