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With the SEC’s Climate Requirements, It Could Be Heavy Lifting Ahead for Banks and Private Borrowers

Matthew Blair • 6/6/2022

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In March 2022, the U.S. Securities and Exchange Commission (SEC) proposed the most comprehensive climate disclosure requirements by U.S. regulators to date. The proposed rule is currently in the comment phase, but if implemented close to its current language, it would require public companies to measure and report their Scope 1, Scope 2, and in some cases Scope 3, Greenhouse Gas (GHG) emissions.  

And it’s possible that this new SEC rule would reach far deeper into the U.S. market than regulated public companies, ultimately requiring the great majority of private companies to comply as well. This is in large part because of the necessary relationship between private companies and large, publicly traded banks. 

Quick Review: What’s Required in Scopes 1, 2 and 3? 

As a quick review, Scope 1 covers direct emissions from owned or controlled resources and Scope 2 covers indirect emissions from the generation of purchased energy. For many large companies, including Cushman & Wakefield, Scope 1 and Scope 2 emissions are currently quantified, calculated and reported on a voluntary basis through companies’ annual ESG reports, CDP, or third-party assessment providers. Scope 1 and Scope 2 emissions are relatively straight-forward to understand, but accurately measuring and reporting these GHG emissions is a more complex task. Many public companies have spent years working through it with the help of a new industry of consultants and third-party vendors that are standardizing and streamlining the process. (Full disclosure, Cushman & Wakefield offers these services.) 

Scope 3 emissions are grouped into 15 categories including employee commutes, use of sold products, capital goods, and upstream and downstream transportation and distribution of sold products. The proposed rules do not currently require disclosure of Scope 3 emissions unless those emissions are “material, or significant to investors, or if companies outline specific targets for them External Link.” 

 

How Scope 3 Can Affect Banks 

For the banking industry, Scope 3 emissions include “financed emissions,” made up of the Scope 1 and Scope 2 emissions from a bank’s borrowers. Depositors are excluded. For the banking industry to comply with this new proposed rule, banks will need to collect accurate Scope 1 and Scope 2 emissions data from their entire client base, which incorporates the complexity of each individual industry across the globe. Over time, banks will likely band together to establish an acceptable industry standard for borrower reporting, much like third-party due diligence reports for commercial real estate lending. 

Private companies are not subject to SEC disclosure requirements; however they will need to prepare to incur the cost of measuring and reporting their emissions immediately. Consider all of the major banks that have made net-zero pledges, most which specifically include a bank’s financed emissions. These banks are advertently or inadvertently subjecting their entire client base to their own requirements. Banks will need to require private company borrowers to establish a measurement and reporting regimen and bring their emissions to net-zero by the banks’ pledged dates. Which is no small task, especially for companies that didn’t make this pledge themselves.  

Public “Net-Zero” Proclamations May Make Banks SEC-Accountable 

As investors begin allocating larger shares of capital to the companies with rigorous GHG reporting regimens External Link, the SEC is taking close note of companies that have publicly announced intentions to reach net-zero. The agency can hold banks and other public companies accountable for public declarations to investors, and a publicly stated net-zero pledge will allow the SEC to compel a bank to gather accurate Scope 3 emissions from all borrowers, private companies included.  

We predict banks will be required to report their emissions, and they will also be required to measure the financial risk to their loan portfolios associated with climate change. The FDIC and OCC have both issued new reporting guidance to banks over $100 billion in assets (essentially the top 40 banks in the U.S.) on how to measure the risks that a warming planet poses to their operations External Link. While these requirements are focused on the risk to assets and collateral, they will still require larger borrower reporting regimens and result in additional costs to private borrowers.  

Cushman & Wakefield’s Banking & Regulatory Solutions (BRS) helps banking clients address diligence, compliance, and regulatory challenges. We provide large-scale outsourcing, technology solutions, and serve as a trusted service provider in the case of acquisitions. 

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