March 10, 2022 - With the SEC’s climate-related proposals imminent, the LSTA hosted Sia Partners and Cadwalader, Wickersham & Taft in their presentation “Climate Risk Study” covering the results of their 70-institution survey on climate risk practices. The project respondents were located in the US, Canada, Europe and APAC and span various segments, including GSIBs, regional banks and investors.

According to the study:

• Climate risk is going to be an integral part of risk management for financial institutions under EU, UK and US regimes
• Globally, institutions have recognized the importance of developing climate risk frameworks with 90% of respondents having at least started the development of a climate risk template.
• 20% of respondents had conducted a meaningful climate risk impact assessment, with some respondents noting that they have chosen to wait until the SEC’s formally opines on disclosure before conducting that assessment.
• Carbon intensity of client portfolios or balance sheets garnered the highest priority for internally tracked KPIs.
• Three key challenges to understanding climate risk were identified: 1) the lack of definition because there are no regulatory standardized metrics and measurements firms can utilize to benchmark their performance; 2) the steep learning curve for climate risk reporting and analysis, and 3) the limitations of data availability and reliability.
• Several best practices were identified, including but not limited to, the importance of determining materiality, industry specific considerations and client priorities and the development of internal controls, including long term strategies, to mitigate risks.
• Respondents in all categories prioritized clarity and direction from the public sector, requesting efforts to provide standardization for disclosure reporting. TCFD guidance informed many of the participants’ practices, with 100% of participants having begun to disclose TCFD’s recommendations or planning to become a supporter.
• 92% of respondents believe the regulators should adopt more standardized or detailed disclosure rules and 100% of G-SIB and US regional banks supported that effort.
• Exclusionary policies which would see firms divesting certain industries, such as thermal coal, were varied among respondents across peer groups and jurisdictions. Some firms noted that they were looking to adopt a “climate-positive” approach rather than a divestment approach on climate.

In addition to the survey results, the panel offered some thoughts on what we might see in the SEC’s climate-related disclosure proposal. First, panelists felt the proposed rulemaking will take a prescriptive approach rather than the more traditional, principles-based approach. That likely means that the SEC will leverage existing voluntary sustainability disclosure recommendations, such as TCFD recommendations, or even industry-specific standards like SASB Standards. It is expected that Scope 1 and Scope 2 emissions (emissions from business operations and purchase energy) will be mandatory, but probably not Scope 3 emissions (emissions the company indirectly impacts in its value chain) which are more challenging to calculate. Finally, it remains to be seen to what extent the SEC’s proposed new rule will draw inspiration from the European Union’s Sustainable Finance Disclosure Regulation (SFDR) and Taxonomy Regulation. We will know soon enough as the proposal is expected any day. As pointed out in Cadwalader’s recent client memo, there may be “differences of opinion as to how climate change will affect investors and companies, one thing is for sure, regulatory change regarding climate-related disclosures is quickly approaching” and compliance will increase costs for investors and companies.

Presentation slides and replays can be found here.