Big banks play ball with SEC on mandatory climate disclosures

WASHINGTON — Faced with the potential requirement that they inform investors about climate change risks, publicly traded banks so far are taking a collaborative approach as the Securities and Exchange Commission prepares the new climate disclosure regime.

Some industry representatives appear to embrace the idea raised in a request for information issued by the SEC in March. Despite concerns about the scope of the information that the agency will require and community bank objections, analysts say large banks may initially back the idea because they have the infrastructure in place to comply.

“If you’re JPMorgan or Citi, you have more resources and more people in every department to deal with this,” said Ian Katz, a director at Capital Alpha Partners. “If you are one of the large banks, … you’re far more likely to have shareholders that are making these demands than if you are a Main Street bank in the heartland of the United States.”

The SEC has met with representatives from large financial institutions after it announced it was seeking public input. The details of a specific proposal are still unclear, but publicly traded companies may face new requirements to inform investors about their contributions to and risk exposure from climate change.

Efforts by the government to assess financial risks from climate change have recently triggered pushback from congressional Republicans, who say the issue is too political for regulators to get involved. They have frequently targeted efforts by the Federal Reserve, which has signaled an interest in climate-related stress tests.

But consistent with large banks’ voluntary efforts to disclose climate change-related information and other positions, the financial sector so far appears to be welcoming the SEC’s approach.

“The industry is pretty committed to being helpful in fighting climate change generally and being constructive around questions like: What should a disclosure regime around climate change or climate-related financial risks look like?” said a source close to the industry.

Yet the industry source, who asked not to be identified, cautioned that financial institutions still have plenty of questions about how the plan will be implemented.

“A lot of it’s just a question of how it gets incorporated into a workable framework,” the source said.

On March 15, the agency asked for input on the scope of greenhouse emissions data that companies should report, what kind of industry-specific climate disclosure requirements should be implemented, and how the SEC should enforce the new standards, among other things.

Observers say the industry’s potential support for a new climate disclosure framework may reflect the reality of the government’s approach.

The Biden administration has sent a clear signal that it is looking to combat climate change and SEC Chairman Gary Gensler has said he believes investors want to know more about their companies’ climate risks. Just this past week, the administration issued an executive order calling on financial regulatory agencies to recommend policies to ensure that climate change does not harm financial stability.

“I think that increasingly investors really want … to see climate risk disclosures. I think issuers would benefit from such guidance,” Gensler said at his March confirmation hearing. (The agency issued the RFI before he started the job.) “So I think through good economic analysis, working with the staff, and putting out to the public to get the public feedback on this, this is something at the commission, if I’m confirmed, I would work on.”

The SEC’s request for information comes as international banks are already complying with disclosure requirements in other countries. The industry is pushing to ensure that U.S. requirements are consistent with global standards.

“This is happening,” said Isaac Boltansky, director of policy research at Compass Point Research & Trading. “There is a push for new disclosures. The odds are, we will see a new disclosure regime, and therefore, it’s almost always better to be in the room discussing it, than on the outside opposing it.”

Analysts argue that banks need to engage with regulators on a new disclosure regime if they want to ensure that new rules aren’t too onerous. Banks may be able to influence the scope of the data that regulators seek to collect from public companies.

“We just need a globally aligned approach that is consistent, harmonious and builds on the variety of entities and existing frameworks,” said Timothy Adams, president and CEO of the International Institute of Finance. “The goal at 100,000 feet is consistency, harmonization, standardization and avoiding fragmentation.”

Meanwhile, community banks remain skeptical of a new climate disclosure regime. Larger banks may be more equipped to handle potential new requirements.

Paul Merski, group executive vice president for congressional relations and strategy and the Independent Community Bankers of America, said he is concerned that the agency would impose a requirement that would be too difficult for small banks to meet. (Many of ICBA’s members are publicly traded.)

“The last thing that banks need or want is additional reporting requirements, particularly on something as complex and opaque as climate risk,” Merski said. “It would be significant because this is brand new, so you’d have to put in all kinds of new systems or accounting or hire people with expertise in this area.”

While major banking trade groups have yet to submit letters in response to the SEC’s request for information, the agency has met with representatives from JPMorgan Chase, State Street Global Advisors and the Bank Policy Institute, according to documents made public by the SEC.

Another source close to the industry said banks want to be engaged in the process of constructing the SEC disclosure framework even though it would apply to all public companies.

“Across the banking sector, they really want to help, they want to do the right thing,” the source said.

European regulators are ahead of the U.S. in devising a climate disclosure regime. The European Commission in 2019 published guidelines on reporting climate-related information.

And the Financial Stability Board’s task force on climate-related financial disclosures, known as TCFD, has its own voluntary recommendations for how banks should disclose their climate-related activities.

Some of the larger banks have already been reporting information related to activities that contribute to climate change. Citigroup, Bank of American and Morgan Stanley have pledged to measure and disclose the impact their lending decisions have on climate change. However, JPMorgan Chase last year resisted calls from activist investors to take stock of how its lending activities impact climate change.

Dan Crowley, a partner at K&L Gates, said a problem with the current climate disclosures that are available today is that it is hard to compare data between companies.

“One of the concerns we hear from institutional investors is that something like 85% of the S&P 500 are now providing ESG disclosures in accordance with the TCFD principles,” Crowley said. “It’s a voluntary system and the disclosures are not standardized or comparable, which makes it difficult for investors to discern exactly what’s going on. And so there’s a push from the institutional investor community broadly to standardize those disclosures on an industry-by-industry basis.”

Banks would also like regulators to recognize that the industry may not be capable of disclosing the entire scope of activities that potentially contribute to climate change.

The TCFD recommends that banks disclose direct greenhouse emissions that occur from sources that are controlled or owned by an organization, known as “Scope 1” emissions, as well as indirect emissions associated with the purchase of energy, known as “Scope 2” emissions.

The task force says “if appropriate,” banks should also disclose “Scope 3” emissions. Those are the result of activities from assets not owned or controlled by firms, but are activities that companies indirectly impact.

Briget Polichene, CEO of the Institute of International Bankers, added that regulators should recognize that it will take time for banks to be able to comply with a broad climate disclosure framework.

“With metrics, like Scope 1, Scope 2, Scope 3, as you go down the line, it gets more and more complicated. So I think there’s concern that … this is going to be very much evolving,” Polichene said. “How do you set up a disclosure framework that takes that into account?”

The second industry source said that a Scope 3 reporting requirement could be particularly challenging because it potentially relies on third-party data.

“I don’t think there is a situation in the past where the SEC has said, … ‘We want you to put in securities documents information where you are relying on unverifiable data from multiple third parties,’” the industry source said.

For banks in particular, a climate disclosure framework could be particularly complex given the broad scope of their customer base.

“The unique challenge for banks is that they are in the business of being intermediaries, as opposed to directly engaging in a particular activity like other companies,” said the first industry source.

Despite efforts to ensure that disclosure standards are consistent internationally, sources close to the banking industry worry that U.S. securities laws pose unique challenges for banks.

“The SEC framework comes with its own legal liability framework,” the first source said. “Folks want to want to be mindful of what the securities law implications are if a disclosure framework were to go into place.”

The industry’s work with regulators to address climate-related risks could put banks at odds with Republicans in Congress. Pat Toomey, R-Pa., the ranking member of the Senate Banking Committee, has argued that financial regulators are not suited to police climate-related activities.

Sen. Kevin Cramer, R-N.D., has introduced legislation prohibiting banks from discriminating against legal industries that are politically disfavored. Cramer has also met with the CEOs of JPMorgan Chase, Goldman Sachs, Wells Fargo, and Citigroup, urging them to continue to serve the fossil fuel industry.

Despite potential blowback from Republicans, Boltansky said banks are putting themselves in a more favorable position if they work with regulators on developing a workable climate disclosure framework.

“At the moment, [Republicans] don’t have the gavel in either chamber, so expect a lot of letters, a lot of strong comments during hearings, but this is happening,” Boltansky said. “When I think about … what Gary Gensler would want his legacy at the SEC to be, I truly believe it is the imposition of a more robust disclosure regime relating to climate, ESG and diversity. And he’s not going to leave until that’s done.”

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