Jun. 08, 2022
Dear Sir or Madame, Please find below our commentary on the proposed rules (File No. S7-10-22) on the enhancement and standardization of climate-related disclosures for investors for your consideration. Commentary: 1. Should we add a new subpart to Regulation S-K and a new article to Regulation S-X that would require a registrant to disclose certain climate-related information, as proposed? Would including the climate-related disclosure in Regulation S-K and Regulation S-X facilitate the presentation of climate information as part of a registrant’s regular business reporting? Should we instead place the climate-related disclosure requirements in a new regulation or report? Are there certain proposed provisions, such as GHG emissions disclosure requirements, that would be more appropriate under Regulation S-X than Regulation S-K? Capital Dynamics supports the proposed inclusion of climate-related disclosures in Regulation S-K and Regulation S-X. This is because climate-related risks and opportunities are decision-useful information for investors to assess the financial risk and return potential of the underlying business. Climate-related financial impacts should therefore be presented together with other financially material information about the business. The omission of financially material climate-related information provides investors with an incomplete picture of the actual risks and return profile of the investee company and as such can mislead investors in their investment decision-making process. Certain climate-related financial risk metrics are more suitable to be disclosed under Regulation S-X, rather than Regulation S-K, because information reported under S-X are subject to internal control (financial reporting). By requiring registrants to include climate-related risk metrics into the S-X filings, the proposed rules ensure companies adopt internal controls over climate reporting and apply higher assurance over climate data, which will support the objective to prevent greenwashing. The assurance should also prevent a mismatch in reporting of GHG emissions in a registrant’s corporate sustainability report. Information regarding climate-related risks is a combination of qualitative and quantitative data, and as such S-K filings seem appropriate for disclosing qualitative assessments of financially material climate matters. In Regulation S-K filings, the following items should be presented in conjunction with climate-related information: · Item 10 [General]: Item 10 requires management to make sound forecasts about the future, which should include climate-related matters, for example: o Impact of the transition to lower carbon economies to the business model o Impact on valuation resulting from climate-related transition risks, physical climate risks and climate-related opportunities o Governance of climate-related matters and climate-related plans · Item 101 [Description of Business]: Description of the current business and future plans should incorporate a qualitative assessment of the current impacts of climate-related matters on the business and industry it operates in, along with the future plans to respond accordingly · Item 105 [Risk Factors]: The description of risk factors should include a qualitative assessment how physical climate risks and climate-related transition risks increase the overall risk in investments into the business, under different climate scenarios (in line with the RCPs scenarios by the IPCC) · Item 302 [Supplementary Financial Information]: The supplementary financial information should include climate-related events, such as changes in the financial performance as a result of wildfires, extreme weather conditions and other physical climate hazards, if occurred. · Item 303 [Management’s discussion and analysis of financial condition and results of operation]: The section contains a trend analysis and provides information about uncertainties that have a potential to materially affect the investee company’s financial performance. As such, this section should include climate-related matters and how the investee company plans to address climate considerations in the short-, medium and long-term future. · Item 305 [Quantitative and qualitative market risk]: The transition to lower carbon economies represent market risk to investee companies. Registrants should disclose their sensitivity towards climate-related matters that have the potential to affect future earnings, fair values, cash flows and disclose their value at risk arising from climate, in particular for instruments rather sensitive to market price fluctuations, such as agriculture prices · Item 407 [Corporate Governance]: The section should include climate-related Governance of the registrant and a description of how climate-related matters are discussed at the Board Level 2. If adopted, how will investors utilize the disclosures contemplated in this release to assess climate-related risks? How will investors use the information to assess the physical effects and related financial impacts from climate-related events? How will investors use the information to assess risks associated with a transition to a lower carbon economy? Registrants should provide a full disclosure of climate-related risks and opportunities to investors in a succinct, clear and non-misleading form and provide full disclosure on the underlying assumptions and methodologies used by the registrant for determining the level of climate-related risks and opportunities. Investors require both, qualitative assessments and quantitative assessments of climate-related matters in order to obtain investment-decision useful information. Investors utilize the disclosures in several ways throughout their investment process: · Due Diligence: Climate-related matters represent systemic risk, which cannot be diversified with traditional diversification strategies among asset classes, sector exposures and geographic exposures. Investors therefore require transparent information about financially material physical climate risks and the predicted annual loss associated with climate risks and the registrant’s plans for managing such risks. Investors also need to understand how resilient an investee company is in the transition to a lower carbon economy, for example, businesses operating in high carbon sectors are more likely to increase their operational costs and reduce profit margins as regulations on carbon prices are expected to rise. More broadly, businesses (in any sector) face more scrutiny by their end consumers over their environmental impact. Therefore, registrants should provide investors with sufficient information how management responds to changing consumer demands and market opportunities in the transition to a lower carbon economy. This will allow investors to weigh up climate-related financial risks and opportunities in their investment-making decision and portfolio construction. · Investment Analysis & Valuation: Investment analysts require transparent information about climate-related risks and opportunities to appropriately price the investment opportunity. Omitting climate-related matters can lead to under- or overvaluation of companies and therefore pose a risk to the functioning of the financial market. · Risk assessment & Probability of default: Investors need transparent information about financially material risks in order to make investments in line with the investor’s risk appetite, risk framework and process for risk management. This includes the probability of default computation in credit risk analysis that gained substantial importance in recent years when insurance companies declared bankruptcy as a result of frequent and intensified wildfires. · Conflicts of interest: Investors require climate-related information to fully manage conflicts of interests arising from various sources, including conflicts of interests arising from the consideration of ESG risks versus other risk factors and the potential distortion of financial flows required in the transition towards a lower carbon economy resulting from greenwashing · Portfolio construction: Investors utilize climate-related information in their portfolio construction, for example to assess the degree of net zero alignment and the support of the goals of the Paris Agreement in their investment portfolios · Suitability assessment/ investment advice: Where financial market participants provide investment advice, climate-related disclosures and risks associated with physical climate and transition risks need to be considered as part of the investment advice and suitability assessment · Engagement strategy & proxy voting: Investors utilize the information on climate-related matters to inform and prioritize their engagement strategy with investee companies and proxy voting decisions · Exit decisions: Exit decisions need to be informed by qualitative and quantitative assessments of financially material risks; this includes a formal assessment of climate-related risks. An insufficient response or management plan to address climate-related financial risks and opportunities can have a material impact on the investor’s returns and may not correspond to the investor’s risk appetite. As such, the disclosure of climate-related matters together with all other financial data and projections, help investors making informed exit decisions · Transparency reporting to end investors: The proposed climate-related disclosures are required to provide transparent investment fund reporting, including standardized metrics to fulfill ESG-related disclosures, such as the proposed SEC rules for ESG fund reporting from May 25th 2022 (“Enhanced Disclosures by Certain Investment Advisers and Investment Companies about Environmental, Social, and Governance Investment Practices”) 3. Should we model the Commission’s climate-related disclosure framework in part on the framework recommended by the TCFD, as proposed? Would alignment with the TCFD help elicit climate-related disclosures that are consistent, comparable, and reliable for investors? Would alignment with the TCFD framework help mitigate the reporting burden for issuers and facilitate understanding of climate-related information by investors because the framework is widely used by companies in the United States and around the world? Are there aspects of the TCFD framework that we should not adopt? Should we instead adopt rules that are based on a 54 different third-party framework? If so, which framework? Should we base the rules on something other than an existing third-party framework? The proposal to mandate climate-related disclosures in the form of the TCFD framework is favorable, as businesses around the globe have already started disclosing under the TCFD framework and some jurisdictions have made the disclosures under TCFD mandatory. The disclosure regime can be applied to any business regardless of sector and size, which makes it a robust framework to assess climate-related risks and opportunities. This ultimately ensures investors receive consistent, comparable and reliable information required for investment decision and monitoring purposes and the ability to provide meaningful ESG fund reporting. 8. Should we require a registrant to disclose any climate-related risks that are reasonably likely to have a material impact on the registrant, including on its business or consolidated financial statements, which may manifest over the short, medium, and long term, as proposed? If so, should we specify a particular time period, or minimum or maximum range of years, for “short,” “medium,” and “long term?” For example, should we define short term as 1 year, 1-3 years, or 1-5 years? Should we define medium term as 5-10 years, 5-15 years, or 5-20 years? Should we define long-term as 10-20 years, 20-30 years, or 30-50 years? Are there other possible years or ranges of years that we should consider as the definitions of short, medium, and long term? What, if any, are the benefits to leaving those terms undefined? What, if any, are the 218 Pub. Law 104-67, 109 Stat. 737. 219 See Securities Act Section 27A and Exchange Act Section 21E. The statutory safe harbors by their terms do not apply to forward-looking statements included in financial statements prepared in accordance with generally accepted accounting principles (“GAAP”). The statutory safe harbors also would not apply to forward-looking statements made: (i) in connection with an initial public offering; a tender offer; an offering by, or relating to the operations of, a partnership, limited liability company, or a direct participation investment program, an offering of securities by a blank check company; a roll-up transaction; or a going private transaction; or (ii) by an issuer of penny stock. See Section 27A(b) of the Securities Act and Section 21E(b) of the Exchange Act. Also, the statutory safe harbors do not, absent a rule, regulation, or Commission order, apply to forward-looking statements by certain “bad actor” issuers under Section 27A(b)(1)(A) of the Securities Act and Section 21E(b)(1)(A) of the Exchange Act. 68 concerns to leaving those terms undefined? Would the proposed provision requiring a registrant to specify what it means by the short, medium, and long term mitigate any such concerns? The registrant should disclose climate-related risks projected under different time horizons (short-, medium and long-term) as proposed by the rules. However, as opposed to the proposal to allow for flexibility in determining what short-, medium and long-term horizons comprise of, it would be preferable to define the length of the time horizons, such as 1-5 years for short-term; 5-15 years for medium term and 15-30 years as long-term. A predefined time horizon allows for comparable information that investors require. The proposed disclosures of climate-related matters should include the management plans to mitigate the risks in the predefined time horizons. 9. Should we define “climate-related risks” to mean the actual or potential negative impacts of climate-related conditions and events on a registrant’s consolidated financial statements, business operations, or value chains, as proposed? Should we define climate-related risks to include both physical and transition risks, as proposed? Should we define physical risks to include both acute and chronic risks and define each of those risks, as proposed? Should we define transition risks, as proposed? Are there any aspects of the definitions of climate-related risks, physical risks, acute risks, chronic risks, and transition risks that we should revise? Are there other distinctions among types of climate-related risks that we should use in our definitions? Are there any risks that we should add to the definition of transition risk? How should we address risks that may involve both physical and transition risks? Climate change risks include both, physical and transition risks. Disclosing only one portion of climate-related risks would provide an incomplete view of the underlying financial risks impacting the registrant’s business. Therefore, both transition and climate risks (acute and chronic) should be disclosed, along with climate-related opportunities that the registrant’s business faces. Investors into fixed assets require the information about physical climate risks to assess the risk exposure. However, physical climate risks have different impacts depending on the underlying asset. For example, increasing heatwaves in California affect a vineyard in a different way than it would affect a solar energy plant in the same location. This is because the sensitivity/ vulnerability of assets against physical climate risks needs to be taken into account. Therefore, to obtain decision-useful information, investors require a sensitivity analysis of the underlying assets in addition to the location (ZIP) information and physical climate hazards projected for the location over the short-, medium- and long-term time horizons. Further, the proposal to include climate-related risks of the registrant’s upstream and downstream value chains requires an extensive data collection effort by the registrant. Incomplete data within the value chain may cause misleading assumptions about the true extent of climate-related risks. Registrants should be allowed a transition period in which disclosures of climate-related risks are first prepared for the own business operations, and as data availability improves in coming years, registrants should then expand on the scope of climate-related matters within their value chains. 18. Should we define climate-related opportunities as proposed? Should we permit a registrant, at its option, to disclose information about any climate-related opportunities that it is pursuing, such as the actual or potential impacts of those opportunities on the registrant, including its business or consolidated financial statements, as proposed? Should we specifically require a registrant to provide disclosure about any climate-related opportunities that have materially impacted or are reasonably likely to impact materially the registrant, including its business or consolidated financial statements? Is there a risk that the disclosure of climate-related opportunities could be misleading and lead to “greenwashing”? If so, how should this risk be addressed? Disclosing climate-related opportunities should be specifically required, so that investors can weigh up the risk/return potentials from financially material climate matters. The reporting of climate-related opportunities can provide investors a more comprehensive view on the registrant’s management of transition risks and adaptability in the transition to a lower carbon economy, as well as how management takes forward-looking climate scenarios into account to mitigate risks and remain financially viable. The risk of greenwashing can be mitigated by confining the scope of climate-related opportunities to the TCFD framework and by disclosing GHG emissions data subject to internal controls. 19. Should we require a registrant to describe the actual and potential impacts of its material climate-related risks on its strategy, business model, and outlook, as proposed? Should we require a registrant to disclose impacts from climate-related risks on, or any resulting significant changes made to, its business operations, including the types and locations of its operations, as proposed? Disclosure of climate-induced impacts on strategy, business model and outlook is a key metric that is decision-useful information for investors. A mere disclosure of GHG emissions and climate-related risks without the analysis of the impacts to the registrant’s strategy, business model and outlook would lack sufficient depth to understand the risk/return profile and valuation, and can therefore mislead investors. 24. If a registrant has used carbon offsets or RECs, should we require the registrant to disclose the role that the offsets or RECs play in its overall strategy to reduce its net carbon emissions, as proposed? Should the proposed definitions of carbon offsets and RECs be clarified or expanded in any way? Are there specific considerations about the use of carbon offsets or RECs that we should require to be disclosed in a registrant’s discussion regarding how climate-related factors have impacted its strategy, business model, and outlook? The proposed rules should distinguish between carbon offsets/ RECs and carbon removal credits. Renewable Energy Credits are a market demand mechanism to signal the demand for renewable energy sources to utility providers. The credits a registrant purchases do not guarantee that the electricity delivered through the grid originated from renewable energy sources. While renewable energy credits are acknowledged in the market-based scope 2 emissions calculations under the GHG Protocol and are often used as component of a corporate’s emission reduction strategy, real-term emissions are not reduced through the purchase of offsetting credits. It should be acknowledged that a business relying on carbon offsets in its climate-related strategy does not actively reduce its exposure to transition risks (for example the risks associated with carbon pricing) and does not directly reduce aggregated GHG emissions. As carbon offsetting prices are expected to rise, such strategy would increase the risk exposure and operational costs substantially over time, which should be taken into account by investors when assessing the registrant’s business outlook. 34. Should we require a registrant to describe, as applicable, the board’s oversight of climate-related risks, as proposed? Should the required disclosure include whether any board member has expertise in climate-related risks and, if so, a description of the nature of the expertise, as proposed? Should we also require a registrant to identify the board members or board committee responsible for the oversight of climate-related risks, as proposed? Do our current rules, which require a registrant to provide the business experience of its board members, elicit adequate disclosure about a board member’s or executive officer’s expertise relevant to the oversight of climate-related risks? The board’s oversight and governance of climate-related risks should be disclosed as proposed in line with the TCFD recommendations. This should include the expertise in climate-related risks at the registrant’s Board level, which is a prerequisite for defining a credible Climate strategy to respond appropriately towards climate-related financial risks and steering the business towards climate-related opportunities, and therefore deemed decision-useful information for investors. 37. Should we require a registrant to disclose whether and how the board sets climate-related targets or goals, as proposed? Should the required disclosure include how the board oversees progress against those targets or goals, including whether it establishes any interim targets or goals, as proposed? Would the proposed disclosure raise competitive harm concerns? If so, how could we address those concerns while requiring additional information for investors about how a registrant’s board oversees the setting of any climate-related targets or goals? The SEC rules should require registrants to disclose climate-related targets and goals where these have been defined. Where registrants have failed to define climate-related targets the registrant should transparently report that no such targets exist along with an explanation why no climate-related targets have been defined. This provides investors with additional information about the registrant’s management and expertise of climate-related matters and inform the business outlook disclosures in relation to climate-related risks and opportunities. 45. Should we require a registrant to disclose whether and how the processes described in response to proposed 17 CFR 229.1503(a) are integrated into the registrant’s overall risk management system or processes, as proposed? Should we specify any particular aspect of this arrangement that a registrant should disclose, such as any interaction between, and corresponding roles of, the board or any management committee responsible for assessing climate-related risks, if there is a separate and distinct committee of the board or management, and the registrant’s committee in charge, generally, of risk assessment and management? The integration of climate-related risk management should be part of the disclosures. It provides decision-useful information for investors whether the registrant has centralized its climate-related risk management into its regular risk management processes, and how the registrant’s risk management interact with the Board’s climate governance representatives to respond to such risks. A disintegration of climate-related risk from other risks signals insufficient competence in managing financial implications of climate-related matters. As such, the disclosure of the climate-related risk management processes and functions is decision-useful information for investors. 46. If a registrant has adopted a transition plan, should we require the registrant to describe the plan, including the relevant metrics and targets used to identify and manage physical and transition risks, as proposed? Would this proposed disclosure requirement raise any competitive harm concerns and, if so, how can we mitigate such concerns? Would any of the proposed disclosure requirements for a registrant’s transition plan act as a disincentive to the adoption of such a plan by the registrant? The disclosure of the transition plan should be made part of the reporting. However, the rules should also state that if a registrant has not (yet) developed a transition plan, then this should be made clear in the climate-related disclosures along with an explanation why the registrant has not (yet) developed a transition plan. By adopting a comply or explain provision, registrants are not disincentivized to adopt such transition plan. 50. If a registrant has disclosed its transition plan in a Commission filing, should we require it to update its transition plan disclosure each fiscal year by describing the actions taken during the year to achieve the plan’s targets or goals, as proposed? Should we require a registrant to provide such an update more frequently, and if so, how frequently? Would the proposed updating requirement act as a disincentive to the adoption of a transition plan by the registrant? The progress towards the registrant’s climate-related targets and transition plan should be updated each fiscal year to provide investors with transparency about the corporation’s management of transition risks and actions taken. This prevents greenwashing and allows investors to assess the registrant’s effectiveness in reducing exposure to climate-related risks, which impacts valuation of the company. 96. Should we require a registrant to express its emissions data in CO2e, as proposed? If not, is there another common unit of measurement that we should use? Is it important to designate a common unit of measurement for GHG emissions data, as proposed, or should we permit registrants to select and disclose their own unit of measurement? Investors require comparable information, as such, the emissions data should be expressed in CO2e, which is a global standard in emissions reporting. Registrants should not be allowed to select and disclose their own unit of measurement, which could result in greenwashing. 98. Should we require a registrant to disclose its Scope 3 emissions for the fiscal year if material, as proposed? Should we instead require the disclosure of Scope 3 emissions for all registrants, regardless of materiality? Should we use a quantitative threshold, such as a percentage of total GHG emissions (e.g., 25%, 40%, 50%) to require the disclosure of Scope 3 emissions? If so, is there any data supporting the use of a particular percentage threshold? Should we require registrants in particular industries, for which Scope 3 emissions are a high percentage of total GHG emissions, to disclose Scope 3 emissions? The proposal defines Scope 3 emissions “material” where registrants have set a GHG reduction target or goal, which includes Scope 3 emissions. This approach however, would provide an incomplete and misleading view on the registrant’s climate-related risks. Scope 3 emissions account for the majority of GHG emissions globally and cover a broad range of categories that provide investors with decision-useful information about the registrant’s business strategy and supply chain. Requiring the Scope 3 emissions disclosures only for corporations that have included scope 3 in its climate strategy/ targets would create a disincentive to businesses to include scope 3 in such goals. This however, would neglect the true extend of climate-related risks and can therefore open up opportunities for greenwashing, whereby purposefully scope 3 emissions are omitted from a climate goal. Instead, all registrants should disclose on a best efforts basis scope 3 emissions. This should be done separately from scope 1 and scope 2 emissions, as the data quality of scope 3 emissions estimates is still lacking behind. 104. Should we, as proposed, allow a registrant to provide their own categories of upstream or downstream activities? Are there additional categories, other than the examples we have identified, that may be significant to a registrant’s Scope 3 emissions and that should be listed in the proposed rule? Are there any categories that we should preclude, e.g., because of lack of accepted methodologies or availability of data? Would it be useful to allow registrants to add 178 categories that are particularly significant to them or their industry, such as Scope 3 emissions from land use change, which is not currently included in the Greenhouse Gas Protocol’s Scope 3 categories? Should we specifically add an upstream emissions disclosure category for land use? The emissions categories should be aligned with those of the GHG Protocol, as it’s a universal standard and allows for comparable data required to make informed investment decisions. Where additional categories are material for the registrant’s business model, such as land use, those emission should be reported out separately. 109. Should we require a registrant to disclose the intensity of its GHG emissions for the fiscal year, with separate calculations for (i) the sum of Scope 1 and Scope 2 emissions and, if applicable (ii) its Scope 3 emissions (separately from Scopes 1 and 2), as proposed? Should we define GHG intensity, as proposed? Is there a different definition we should use for this purpose? GHG Intensities are important KPIs for assessing a registrant’s emissions efficiency and allows investors to compare the resource efficiency among different firms operating in the same sector. It also provides an indication of the corporations’ effectiveness in managing climate-related risks and allowing a trend analysis of how a business has improved its emissions efficiency over time. This in turn is decision-useful information for investors since a business, which improves its emissions efficiency is likely more competitive and resilient in the transition to a lower carbon economy. 132. Should we require a registrant to follow a certain set of published standards for calculating Scope 3 emissions that have been developed for a registrant’s industry or that are otherwise broadly accepted? For example, should we require a registrant in the financial industry to follow PCAF’s Global GHG Accounting & Reporting Standard for the Financial Industry when calculating its financed emissions within the “Investments” category of Scope 3 emissions? Are there other industry-specific standards that we should require for Scope 3 emissions disclosure? Should we require a registrant to follow the GHG Protocol’s Corporate Value Chain (Scope 3) Accounting and Reporting Standard if an industry-specific standard is not available for Scope 3 emissions disclosure? If we should require the use of a third-party standard for Scope 3 emissions reporting, or any other scope of emissions, how should we implement this requirement? Registrant’s should use globally accepted industry standards for the calculation of GHG emissions. This includes the GHG Protocol’s Corporate Value Chain Scope 3 Accounting and Reporting Standard, as well as the Partnership for Carbon Accounting Financials (PCAF) standard for computing financed emissions. These standards are designed to facilitate the estimations and disclosures of emissions sources and promote robust methodologies, which help comparability of information and help prevent greenwashing. For investors it is therefore important to receive climate-related financial risk metrics, which follow industry-wide accepted standards. Kind Regards, Verena Rossolatos CapitalDynamics Verena Rossolatos Vice President, ESG Specialist Bahnhofstrasse 22 6301 Zug Switzerland Please consider the environment in deciding whether to print this e-mail. Disclaimer: This message (incl. attachments) is confidential, for the exclusive use of the intended recipient and may contain privileged information. 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