As financial services firms assess global disclosure regulations, they may need to transition to investor-grade ESG reporting and upgrade current processes and controls that fall short.

Particularly thorny is the question of how to measure financed emissions. While Scope 3 emissions aren’t covered by the SEC rules, other global regulations require reporting on this topic.
Financial firms should expect to have little comparable reporting data from their counter-parties about climate risks and emissions. While California’s climate disclosure requirements include private companies that meet certain criteria, some private market organizations will not be subject to reporting requirements presenting an additional data collection challenge. This is an evolving area and standardization will take time.

Medium-size banks that may have not focused intently on climate reporting may now find themselves in the same regulatory bucket as GSIBs. They face a daunting challenge of ramping up the collection, verification and reporting of climate data — plus any methodology used in their simulations — within a limited window of time.

Consumer markets companies function within a value chain ecosystem that may include thousands of suppliers. That supply chain adds complexity to reporting on Scope 3 emissions, and companies subject to ESG disclosure regulations will need to use a combination of estimation approaches and actual data collection. This could be especially challenging because many private sector companies in the supply chain won’t be subject to ESG disclosure rules and may not be as prepared to respond to customer requests. While the SEC rules don’t cover Scope 3 emissions, other global regulations do.

Energy companies and utilities continually invest in infrastructure to improve asset resilience and operational reliability. The regulations differ when it comes to the delineation between routine costs associated with reliably supplying energy to customers or recovering from typical weather events versus the climate-related disclosures required under many global disclosure rules.

The need for accurate and reliable data may provide unique challenges for companies with assets like pipelines, transmission lines, drilling rigs or offshore wind turbines. The expanded global disclosure rules beyond the industry’s already extensive reporting requirements, as well as an accelerated timeline for sustainability reporting, will likely require increased investments and enhancements of existing processes and systems.
While the SEC rules don’t cover Scope 3 emissions, other global regulations typically require companies to disclose emissions from upstream and downstream activities indirectly connected to their assets. Scope 3 will likely be material for energy and utilities regardless of decarbonization commitments in industry-specific, high-emitting GHG emissions categories such as “fuel and energy-related activities” and “use of sold products.” Other Scope 3 categories could also be material for these companies.

Recent studies indicate that the US healthcare system is responsible for about a quarter of all global healthcare greenhouse gas emissions. Global disclosure requirements will increase pressure on both public and private healthcare organizations to address the effects of climate change. Executives will need to consider where they’re focusing. For example, has their organization adjusted its clinical service line, growth and population health strategies to incorporate the specific climate health effects on the communities it serves? Once an organization has reprioritized its healthcare services accordingly, how does that impact capital plans, clinician recruitment plans and the research portfolio?

Patients, communities, regulators and other stakeholders expect healthcare organizations to not only help individuals recover from the health effects of climate change but to help solve the problem and not add to it. While addressing regulatory requirements is important, the ability to differentiate as a healthcare organization through decarbonization strategies to transform health facilities, supporting operations and the healthcare supply chain can engender trust among all stakeholders and create a sustainable competitive advantage.

Industrial products companies will need to consider physical risks posed by climate change to their infrastructure, especially those at risk for flooding, wildfires and hurricanes, and to confirm these are managed with the same rigor as other enterprise risks.

Industrial products companies should begin (or accelerate) efforts to track direct GHG emissions for their operations (Scope 1 and 2). While Scope 3 emissions aren’t covered by the SEC rules, other global disclosure regulations do require reporting on this topic. That means industrial products companies will likely need to collect data and report on such things as the upstream raw materials and intermediary finished goods they source, as well as the downstream impact from their products.

Insurers, as with all sectors, may need to enhance climate reporting to investor-grade climate reporting. That means upgrades to current processes and controls.

Of specific relevance to insurers is how to measure Scope 3 financed greenhouse gas emissions. Further challenges include differing approaches to measuring financed emissions and the fact that existing standards, such as the Partnership for Carbon Accounting Financials (PCAF) don’t cover all asset classes.
Global reporting requirements likely mean that any insurer that has set a climate-related target or goal which includes its underwriting portfolio will need to report insurance-associated Scope 3 emissions.

Given the prevalence of climate-related commitments in the pharmaceutical and life sciences sector, many companies will need to publish information about their climate-related targets or goals that have materially affected or are reasonably likely to materially affect the business, results of operations or financial condition.

The SEC rules require companies to report on their Scope 1 and 2 emissions, but not Scope 3 emissions that occur largely throughout supply chains, although other global regulations do require this reporting. Scope 3 emissions may prove to be the most challenging task for pharma companies that source from complex, international networks of suppliers. That will likely mean rethinking suppliers based on the size of their carbon footprints.
Providers also need to consider the physical risks posed by climate change to their infrastructure as well as their operations (for example, pharmaceutical production is a water-intensive process, greatly contributing to a company’s carbon footprint).

The first step for portcos and funds is to determine the applicability of guidance (filing requirements, exit plans and strategies in the public market, etc.) and focus on those where applicable.

Many portcos that are (or may be) subject to the global disclosure requirements are likely in the process of collecting data that would satisfy Scope 1 and 2 requirements. Fewer, though, are working on assessing their Scope 3 emissions requirements. They may find their banks and larger investors (who would be subject to the global requirements) requesting this data from them.
For many funds, Scope 3 is a relatively new concept as few have tried to calculate indirect, downstream emissions. Leaders in this space are coordinating their efforts across their portfolio companies by baselining Scope 1 and 2. We would expect disclosure rules to accelerate this process.
We encourage both funds and portcos to determine what data they can consistently receive and from there conduct a diagnostic to target priority issues.

Given the prevalence of climate action commitments in the technology, media and telecommunications sector, many companies will be subject to ESG regulations. The requirements mean companies will need to produce disclosures on the supporting plans and progress for meeting those commitments, including for Scope 3 emissions when applicable.

Telecommunications providers will need to consider physical risks posed by climate change to their infrastructure, especially those at risk for flooding, wildfires and hurricanes, and confirm these are managed with the same rigor as other enterprise risks.

Many technology companies are leading the way in the transition to a low carbon future. From smart buildings to smart grids, the path to decarbonization is digital. However, the growing demand for GenAI, cloud computing and cloud services also places a burden on tech companies to manage their data centers’ energy efficiency and power their operations with renewable energy.
Tech providers have a critical role to play in the climate transition, from carbon accounting solutions to enabling smarter supply chains, factories, cities and energy grids. The global requirements represent an opportunity for providers to double-down on developing these technologies to support ESG reporting requirements.