Early in 2022, the U.S. Securities and Exchange Commission (SEC) underlined the significance of the climate crisis by issuing a historic ruling on climate change disclosure rules including providing climate-related financial data, carbon footprint, and greenhouse gas emissions.

And, as companies begin to adhere to this proposed SEC Climate Disclosure rule and increase their climate-related reporting, asset managers may also have to change their investment decisions and philosophies accordingly. 

This article explains the impact of the SEC Climate Disclosure on investment decision making for asset managers.

Understanding the SEC Climate Disclosure Rule 

At the basic level, the proposed SEC Climate Disclosure will require standardized climate reporting for publicly traded companies, including information on the environmental impacts of their operations and climate-related risks to their business. 

Interestingly, about one-third of companies were already making disclosures of this nature when they deemed it material. However, this new rule requires all publicly traded companies to include a minimum level of climate-related disclosures alongside their other mandatory reporting of registration statements and annual reports. 

The SEC is proposing this rule because more investors are demanding increasing transparency from companies about their environmental impact and climate-related risks. And, the reason investors are focusing on companies with better Environmental, Social, and Governance (ESG) ratings is because companies with better ESG ratings continue to outperform their peers. 

For more on ESG, check out these blogs: What is ESG Investing, ESG Criteria and Scoring, and How ESG Impacts Pricing and Lending Decisions

SEC Climate Disclosures Required of Companies

The new SEC Climate Disclosure rules will require mandatory disclosures from companies about their activities and how it impacts the climate; these disclosures are both qualitative and quantitative falling into various levels, including: 

  • Scope 1 & 2 greenhouse gas emissions (direct and indirect)
  • Scope 3 greenhouse gas emissions on the material from suppliers and partners
  • The internal price of carbon, if applicable
  • Physical risks (severe weather, storms, etc.)
  • Transition risks (how can they operate in a more carbon-neutral economy)
  • Climate-related risks that are likely to have a material impact on the business
  • Information on climate-related targets, goals, or transition plans (if applicable)

The guidelines will give organizations a straightforward way to report climate-related issues that are useful for companies, asset managers and investors, and standardized across industries.

With all public companies adhering to these rules and providing climate-related disclosures, they will be easier to compare and be analyzed through the lens of a less carbon-reliant economy. 

Impact of SEC Climate Disclosure on Asset Managers 

Under the new SEC climate disclosure rule, details around a company’s greenhouse gas emissions, potential impacts from a future carbon tax, or how their operations could be affected by rising sea levels will provide valuable information that would be pertinent to asset managers.

As a result, investors will one step closer to increasing transparency about a company’s climate-related risks in today’s environment.

By having consistent, comparable, and insightful climate-related financial information, asset managers can:

  • Identify new investment opportunities with the right signals around climate change
  • Have confidence that the companies already in the portfolio are reporting as per SEC requirements
  • Accurately assess risk and avoid investing in companies that are overexposed to environmental risks or have disproportionate carbon footprints

Maintaining a portfolio with a balanced risk-reward tradeoff is fundamental for asset managers—especially when it comes to climate impact. Therefore, this extra layer of transparency will undoubtedly change how investors view certain companies’ climate awareness. 

How No-Code AI Can Help Identify Companies Complying with SEC Climate Disclosure Rules

With AI / ML / NLP, asset managers can (without hiring data scientists or software engineers) reap the benefits of ESG sentiment analysis. With no technical knowledge, any analyst or business expert can determine the news sentiment around recent developments or announcements and  quickly make informed investment decisions.

With the Accern NoCodeNLP Platform, asset managers can track 26 ESG Sustainability Issues for over 60,000 public companies and can quickly access accurate real-time data on companies complying with the SEC climate disclosure requirements. 

Using the pre-assembled data sources – global news and public data and content from leading data providers including FactSet, Morningstar, Dow Jones, Naviga, and more – users can build ESG-focused NLP models with historical and real-time information.

Download the Accern ESG ebook to learn more about how No-Code NLP can help asset managers identify ESG behaviors for effective decision making for their portfolios.