SEC may be sued by climate groups, investor coalition releases oil and gas standard, and more.

April 21, 2023

The top five climate risk and disclosure stories this week.

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Environmental groups may sue SEC over climate rule

The US Securities and Exchange Commission (SEC) could face lawsuits from environmental groups if it waters down its pending climate risk disclosure rule, Bloomberg Law reports.

The Sierra Club and Earthjustice are “strongly considering” legal action if the agency scraps a requirement that would compel large companies to disclose their Scope 3 (indirect) emissions, the publication writes. Scope 3 emissions refer to the pollution created by companies’ suppliers and end-customers. 

According to three climate advocates interviewed by Bloomberg Law, the environmental groups will make a decision on a lawsuit once the SEC adopts the final version of its climate risk disclosure rule. The agency’s most recent agenda says the final rule is due to be finalized this month.

On Tuesday, the House Financial Services Committee grilled SEC chair Gary Gensler on the agency’s rulemakings. Democratic Congresswoman Ayanna Pressley warned Gensler that it is “not the time to backtrack” on climate disclosures. “The people want to see Scope 3 disclosures,” she said. “The European Union and other countries around the world are implementing new disclosure rules that include Scope 3 emissions in the next few years … Now is the time for action and to put people over polluters.”

UK firms haven’t linked climate risks to decision-making — BoE

Climate risks are continuing to build up in the UK economy, even though banks and insurers have improved their climate capabilities, a senior official at the Bank of England (BoE) said.

Sarah Breeden, the BoE’s executive director for financial stability, said on Tuesday that the UK is yet to reach the “tipping point” at which financial institutions’ understanding of climate risks and opportunities drive “strategic decision-making.”

“The shift I had hoped to see in stronger linkages between climate change and strategic decision making across the economy have proved harder to deliver in practice,” said Breeden.

This is partly because of global events, including the COVID-19 pandemic and Russia’s invasion of Ukraine, she added. But Breeden also cited four key challenges specific to the UK economy that must be overcome to make meaningful climate progress.

The first is equipping financial institutions with forward-looking information from the real economy to mobilize transition finance at scale. Breeden said this could be supported through the widespread adoption of the climate disclosure rules under development by the International Sustainability Standards Board (ISSB), as well as the guidance drafted by the UK’s Transition Plan Taskforce. 

The second challenge is overcoming the deprioritization of climate issues amid geopolitical headwinds and continuing to make progress on the climate transition, even as macroeconomic threats — like the Russia-Ukraine war — are top of mind.

Third, Breeden said financial firms and real-economy companies have to make “transition-driven business decisions” in the absence of a clear climate transition roadmap from policymakers and regulators. Setting “clear and comprehensive policy” will take years, Breeden said, and companies can’t and shouldn’t wait to make long-term decisions as lawmakers finesse a nationwide net-zero strategy. 

The fourth challenge is for firms to scrub emissions from their supply chains by engaging with counterparties and suppliers. “That does not mean immediately ceasing to deal with high emission counterparties and suppliers,” said Breeden, adding that engagement on the climate transition is a surer path to economy-wide emissions reductions.

Breeden was speaking before Chapter Zero, a group of non-executive directors working to make sure their businesses respond to climate change effectively.

IIGCC releases net-zero oil and gas standard

Investors overseeing €60trn (USD$66trn) in assets have published a blueprint for assessing oil and gas companies’ transition plans.

The Institutional Investors Group on Climate Change (IIGCC), a European-based coalition of over 400 asset owners and managers, wants the blueprint to support efforts to engage upstream, midstream, and integrated oil and gas firms on aligning with a 1.5ºC climate scenario. It is also intended to provide visibility into the fossil fuel-related transition risks within investor’s portfolios. 

“Covering the sector facing some of the biggest challenges in the transition to a low carbon economy, the Net Zero Standard on Oil & Gas will be a valuable tool for investors as they develop and hone their climate-related engagement and escalation strategies for oil and gas companies,” said Stephanie Pfeifer, the IIGCC’s CEO. “For oil and gas companies, the framework also provides clear guidance on what investors would like to see in a net zero transition plan and how these will be assessed.”

The standard includes an indicator list and scoring framework to rate the net-zero alignment of individual firms. These will be used to run public assessments of oil and gas companies later this year. The indicators capture information on the scope of a firm’s net-zero ambition, the type of Scope 1, 2, and 3 emissions targets it has in place, and the revenues or energy production it generates from climate solutions, among other things.

The IIGCC intends to publish metrics on the companies it assesses, including their green energy, revenue, and capital expenditures, upstream fossil fuel capital expenditures, and carbon capture investments. All the metrics align with the indicators used by the Climate Action 100+, another investor group, for calculating its Net Zero Company Benchmark. The Benchmark is used to assess the climate performance of high-emitting companies and to identify those that should be prioritized for investor engagement.

BP investors plan revolt following emissions target changes

Major investors in oil supermajor BP plan to oust the company’s chair in response to the firm’s decision to water down its decarbonization strategy.

Five UK pension schemes — Nest, USS, Brunel Pension Partnership, Border to Coast, and LGPS Central — said they will vote against the reappointment of Helge Lund in retaliation for not being consulted on the changes made in February. 

BP now aims to cut oil and gas production by 25% by 2030, relative to a 2019 baseline, compared to an initial 40% reduction that was approved by shareholders. This means the company’s emissions will fall more slowly, by around 20% to 30% by 2030, compared to 35% to 40% under the initial target.

BP justified the target shift by pointing to Russia’s invasion of Ukraine, which shut off supplies of Russian oil and gas to most of the West. High energy prices last year led BP to record profits of more than USD$27bn.

“We will vote against the re-election of the chair at BP due to the absence of meaningful engagement with shareholders on the recent changes to BP’s net zero strategy,” said David Russell, head of responsible investment at USS. 

BP’s annual general meeting will take place on April 27.

ECB warns banks on poor quality climate disclosures

Climate risk disclosures made by banks in the European Union (EU) are of too low quality to meet incoming supervisory standards, the European Central Bank (ECB) has said.

Of the major firms covered in its third assessment of EU banks’ climate disclosures, released Friday, the supervisor found that only 6% produced “broadly adequate” data across five key areas. These include materiality assessment, business model and strategy, governance, risk management, and metrics and targets. 

While half of banks disclose some information on their financed emissions, this data is “incomplete, unspecific or not properly substantiated” in most cases, the ECB said. However, 86% of banks are now disclosing information on their material exposures to climate and environmental risk, up from 36% last year. Over 90% report basic information on how they identify, assess, and manage these risks.

EU banks have to produce new reports that cover environmental, social, and governance issues by June of this year.

The ECB identified a group of persistent laggards that have produced insufficient climate disclosures year-on-year. Six lenders have published climate risk data that either does not link to any kind of risk assessment or that only refers to their own operations, meaning they do not provide data on their financing portfolios.

“These banks have not yet adequately reflected supervisory feedback and have not demonstrated preparedness for the level of disclosures required by the applicable regulatory framework that require better disclosures considering also relevant industry initiatives,” the ECB said.

In a statement accompanying the assessment, Frank Elderson, vice chair of the ECB’s Supervisory Board, said “further improvements are urgently needed.” He reiterated that the central bank will “take the appropriate supervisory actions” to ensure firms meet its disclosure expectations, which were first set out in November 2020.