Investors’ Use of Climate and Greenhouse Gas Information Is Growing, SEC Chair Says

If a proposed Securities and Exchange Commission rule on climate-related disclosures passes, the regulator will be focused solely on ensuring “consistency and comparability” so that investors can make informed decisions, Chairman Gary Gensler said while speaking at a conference of institutional investors on Monday.

Gensler made the comments while addressing the SEC’sproposed rulefromMarch 2022 that would require public companies to disclose information about their “climate-related risks that are reasonably likely to have a material impact on their business.” Under the rule, issuers of stocks and bonds would also be required to disclose Scope 1 and 2 greenhouse gas emissions (their direct emissions and indirect emissions from electricity, respectively); and Scope 3 emissions (those from their supply chain, if it is material or if the issuer has a GHG goal).

Many issuers are already disclosing their GHG emissions, and more investors are demanding this information or at least considering it in their investment strategy, Gensler said at a conference hosted by the Council of Institutional Investors. This information is already in capital markets as a result of market demand, according to the chairman, and the SEC’s role is more about ensuring valid reporting for investors than about influencing strategy.

Amy Borrus, CII’s executive director, noted in leading the discussion with Gensler that the climate disclosure rule is likely to be challenged in court. Gensler responded that the SEC has not yet finalized the rule and is carefully considering approximately 15,000 comments that have been submitted, which he said is a record number for the SEC.

Never miss a story — sign up for CIO newsletters to stay up-to-date on the latest institutional investment industry news. 

The SEC is “merit neutral” when it comes to how investors should incorporate GHG emissions into their investment strategy, Gensler told the audience. If someone wants to go “long on green” or “short on green,” that is not the SEC’s business, he said. Instead, the regulator is looking to standardize these disclosures for the benefit of investors that consider this information material.

Borrus asked Gensler specifically about Scope 3 climate disclosure, the most controversial of the three, which would require some registrants to report GHG in their value chain. Gensler responded that he did not want to get ahead of the rulemaking process and, even though disclosures of all three scopes are becoming more common, Gensler conceded that this area is “not as well developed.” He said the SEC’s “tiered approach” to GHG disclosure, requires Scope 1 and 2 disclosure by all registrants, but exempts smaller companies and those issuers who do not have an emissions goal or target from Scope 3 disclosure.

During the conversation, Gensler asked for comments on aproposed ruleonminimum pricing increments, which would change pricing increments for National Market System stocks from a full cent to sub-penny increments. He said he especially wanted more comments on how to create a more level “playing field” between “lit and dark markets.”

Borrus asked Gensler why the SEC has preferred to take enforcement actions against cryptocurrency issuers instead of issuing new rules. Gensler responded that securities laws already apply to crypto, and an important goal for the SEC going forward will be “to bring this field into compliance.”

Related Stories:

Congressional Republicans Take Aim at SEC Climate Disclosure

Federal Reserve Proposes Climate Risk Framework for Large Financial Institutions

Alternative Asset Managers Launch ESG Disclosure Tool

Tags: Amy Borrus, Carbon Emissions, climate-related disclosure, Council of Institutional Investors, Gary Gensler, Securities and Exchange Commission

Ever so slowly, the rotation into cyclicals and out of defensives is happening. Last year was the time for defensive plays, as investors expected inflation, rate hikes and a recession to wreak havoc. But that recession still seems in the distance—as one wag put it, the downturn is always six months away.

Note that the rotation is occurring very slowly, with investors still seeing a raft of potential problems hovering in the future—as in that recession that keeps skulking in the shadows. Sam Stovall, CFRA Research’s chief investment strategist, noted in a report that, “The embryonic rotation out of defensive groups and into cyclical sectors is evident in the weak YTD returns.”

In other words, 2023 has been volatile, as whipsawed investors can attest. After a good January, stocks sank in February and, thus far in March, have inched upward again. The S&P 500 finished Monday ahead 5.4% for the year.

Undergirding these fluctuations is an anemic earnings picture. S&P 500 earnings for 2022’s last quarter declined 4.6%, per FactSet Research Systems. What’s more, analysts expect profit drops for 2023’s first half and a rebound in the second six months.

Want the latest institutional investment industry news and insights? Sign up for CIO newsletters. 

Meanwhile, the market, at least, has transformed itself into a classic rally configuration. As Stovall put it, “Following down years, U.S. sector rotation has typically gone from ‘first to worst,’ meaning that the groups that held up best during the downturn—typically, the defensive consumer staples, health care, and utilities sectors—are replaced by the groups that fell the furthest in the prior year.”

In 2022, cyclicals communications services, consumer discretionary and information technology were the dogs. Consumer staples and utilities, the quintessential defensive plays, were on top. Then the game board switched.

As of last Friday, info tech was the leading S&P 500 sector, ahead 13% for the year, followed by communications services at 12.2% and consumer discretionary at 12.1%, according to Yardeni Research. The two last-place sectors were utilities, at negative 6.2%, and consumer staples, at minus 2.7%.

But the change in market leadership has not been quick, as Stovall pointed out: “Just as it takes longer to turn a cruise ship than a jet ski, so too 40-week strength and weakness takes a while to realign.”