Regulators and Investors Sharpen Their Climate and ESG Focus
The SEC and others will be taking a close look at climate risk disclosures.
- Lauren Kim
- July 2021
Interest, scrutiny and expectations regarding environmental, social and governance (ESG) matters are evolving. Companies and the insurance carriers that insure them have noticed, and they are evaluating best practices regarding disclosure and management of climate investments, risks and practices.
Since the Biden administration took office, the increased importance of climate issues in Washington, D.C., has been clear. The SEC recently released a Risk Alert, based on the Climate and ESG Task Force's initial findings, stating that companies should engage in clear and simple disclosures that:
- Are precise and tailored to firms' specific approaches to climate and ESG investing.
- Accurately convey the material aspects of the firms' approaches to ESG investing.
- Align with the firms' actual practices.
This alert comes on the heels of SEC Chairman Gary Gensler's confirmation hearing, where he stated: “Increasingly, investors really want to see—tens of trillions of dollars in assets behind it—climate risk disclosure.”
Shortly thereafter, the SEC announced the formation of the Climate and ESG Task Force, with an initial focus on identifying any material gaps or misstatements in issuers' disclosures of climate risks under existing rules and proactively identifying related misconduct.
Treasury Secretary Janet Yellen has likewise tasked the Financial Stability Oversight Council to assess the financial risks associated with climate and share that information with regulators and private investors.
This increased regulatory focus comes as investors have turned their attention and funds to climate issues. Investors are placing sustainability at the center of their investment approaches and requesting that corporations disclose their climate-related actions, including but not limited to sustainability. Activist hedge funds are becoming more involved in pushing their climate agenda. One such activist hedge fund recently ran its own slate of independent directors against an oil giant's directors. In what is being called a landmark moment, the hedge fund won multiple board seats with the pledge to push the oil company away from fossil fuels, toward alternative fuels, and otherwise address climate issues.
Markets are responding to this interest. Global financial institutions have increased their commitments to sustainable and clean energy projects, and money is flowing into climate-related funds and bonds. Bonds centered on climate and climate investing have seen skyrocketing growth. Global green bond issuance could reach $400 billion—or even $450 billion—this year, versus $270 billion last year. Sustainability bonds also have grown in popularity. Additionally, the sustainability-linked bond market has been projected to grow to around $120 billion to $150 billion.
Insurers also are feeling the impact of climate. The industry anticipates record catastrophic losses in response to this year's severe winter weather in Texas, Louisiana and other southern states. Estimates of property damage losses range from $10 billion to $20 billion, approaching Hurricane Harvey levels.
Moving forward, companies and their insurers must be aware of the increased scrutiny, interest and expectations around climate issues—from both regulators and investors—and ensure they are planning and calculating risks appropriately.
In response to these concerns, companies should maintain policies, procedures and practices designed in view of their particular approaches to climate and ESG. They also must have compliance personnel knowledgeable about the firms' specific related practices.
Best’s Review contributor Lauren Kim is senior vice president, Financial Institutions Group Legal and Technical Leader, at NFP. She can be reached at firstname.lastname@example.org.