Bloomberg Law
Free Newsletter Sign Up
Login
BROWSE
Bloomberg Law
Welcome
Login
Advanced Search Go
Free Newsletter Sign Up

SEC’s Climate Plan Poses Compliance Hurdles for Mid-Tier Banks

March 23, 2022, 4:04 PM

Large regional banks with oil and gas industry clients are the financial firms that would face the biggest compliance challenges if the SEC’s climate disclosure proposals take effect.

The eight largest U.S. banks have experience with reporting on the impact that their own operations, as well as loans, securities offerings and investments, have on climate change and emissions. Europe and other countries where they operate already require climate change risk disclosures to investors.

But large regional banks, like Zions Bancorporation NA and Comerica Inc., lack global exposure and so have the steepest climb once the Securities and Exchange Commission’s rules are finalized. This is especially true for those banks with exposure to the energy sector.

Determining which disclosures to make and ensuring the accuracy of customer-provided data will be the biggest considerations for these types of banks.

“Financial institutions are going to be struggling to find appropriate talent to assess for this. It’s going to be a big challenge for regional, super-regional and large community banks,” said Peter Dugas, executive director at Capco, a global financial services industry consultancy.

The SEC’s proposal doesn’t apply to most community banks, which aren’t publicly traded or are too small to come within the proposal’s purview.

‘Scope 3' Disclosures

The SEC on March 21 proposed requiring that all publicly traded companies report the amount of greenhouse gases they emit, their exposures to climate change risks, and emissions produced by companies that use their products.

Of these proposals, publicly traded banks will have the greatest difficulty with the third—reporting on emissions from all parts of their supply chains and those of the customers using their products, known as “Scope 3" emissions.

The proposal would require banks to evaluate their loans to clients, underwriting of securities offerings, and other investments for climate risk and greenhouse gas emissions.

The SEC gave some leeway on filing these exposures, proposing to include extra time to comply and the power to determine whether Scope 3 emissions are necessary for investors to know before making decisions.

Bank customer emissions aren’t likely to be considered material to investors in most cases, said Bloomberg Intelligence analyst Nathan Dean. But “it still means the banks have to do an internal review of their climate risks and/or if they have already made determinations related to their climate-related goals,” he said.

There is still a strong argument that customers’ emissions will be considered just as material to a company and its investors as direct emissions and energy the company purchases, said Clifford Chance LLP partner Celeste Koeleveld. These more direct emissions are known as Scope 1 and Scope 2 emissions.

The SEC proposes to require Scope 3 disclosures only if a company references them or has set a greenhouse gas emissions target that includes them.

But if the rule goes forward, it appears inevitable that companies will have to consider customers’ emissions and make disclosures about them, said Koeleveld, a former general counsel at the New York Department of Financial Services.

The DFS already has a comprehensive climate reporting regime for the banks and insurers it oversees. But the results of DFS examinations aren’t made public in the same way the SEC’s proposed disclosures would be.

Data Problems

Scope 3 reporting also presents a data quality problem for banks, said Lauren Anderson, a senior vice president and associate general counsel at the Bank Policy Institute, a lobbying group.

Banks already have to perform due diligence on the companies they lend to, invest in, and underwrite. That work includes extensive questionnaires for customers.

But that due diligence requires that a bank’s clients provide sufficient information for accurate climate disclosures.

The SEC’s proposal “may be overly ambitious given persistent data gaps,” Anderson said.

Banks can add a few climate exposure questions to help them comply with the SEC’s proposed guidelines, said Mayra Rodríguez Valladares, managing principal at MRV Associates Inc., which trains bank examiners and finance executives.

Those questions also could help them comply with forthcoming climate-related requirements from the Federal Reserve, Federal Deposit Insurance Corp., and Office of the Comptroller of the Currency, she said.

“That certainly will be a very good start. It’s not difficult,” she said.

Even with potential borrowers and other clients providing necessary information on climate risks, banks will have to increase the amount of time and money they spend on reporting their results.

And for banks that don’t operate in jurisdictions where such reporting is the norm, costs will go up, Rodríguez Valladares said.

The smart banks were preparing even before the SEC released its proposal, she said.

“They’re not waiting around for the SEC to tell them what to do,” Rodríguez Valladares said.

—With assistance from Lydia Beyoud

To contact the reporter on this story: Evan Weinberger in New York at eweinberger@bloomberglaw.com

To contact the editors responsible for this story: Laura D. Francis at lfrancis@bloomberglaw.com; Roger Yu at ryu@bloomberglaw.com