How the SEC’s Climate Disclosure Rule affects private markets

Scope 3 emissions disclosure requirements – which would have involved private companies in the supply chain of public companies – have been left off the rule. But it could still affect private fund managers' exit plans and debt investments.

The newly-passed SEC Climate Disclosure Rule has given private companies a reprieve. The initial proposal, issued two years ago, required public companies registered in the US to disclose material Scope 3 greenhouse gas emissions. While the SEC does not have jurisdiction over privately-held companies, the Scope 3 requirements would have seen public companies seek emissions data from private companies in their supply chain – prompting much more widespread collection of this data across private markets.

The final rule omits any requirement for companies to disclose Scope 3 emissions. This was a controversial scale-back of the initial proposal, prompted by an immense volume of comment letters received by the SEC citing the difficulty of obtaining reliable, auditable Scope 3 data.

But the rule is still relevant to private markets. Here are three major ways:

1. Listed asset managers

Many private fund managers are themselves public companies, regulated by the SEC. Private equity and private debt behemoths such as Blackstone, KKR, The Carlyle Group, Apollo and Ares will have to disclose material physical and transition climate risks to their business. Hypothetically, this could include disclosing how real estate properties that they derive revenues from are vulnerable to extreme weather events; or how energy strategies could be impacted by the global transition. If listed investment firms have announced transition, decarbonisation or net zero plans, they will need to disclose progress against these plans too.

2. Private debt to public companies

Private debt funds are participating more and more frequently in loans to public companies. The mandatory inclusion of material climate risks in borrowing companies’ annual reports and SEC filings give these debt funds another resource in their diligence process for borrowers. Lenders use borrowers’ public filings such as 10Ks in their diligence processes “all the time”, says Ken Rivlin, global head of environmental law at Allen & Overy. Climate risk disclosures in the 10K “would be one of the many issues that would be diligenced by the lender, although probably not the primary issue,” says Rivlin.

3. IPO-readiness

“If a company is planning or aspiring to go public, it will need to have systems in place to comply with all the reporting requirements,” Allen & Overy’s Rivlin says. There are already a raft of materiality and other disclosure regulations from the SEC that companies must comply with when attempting to IPO. But the newly-passed climate rule “adds to that”, says Rivlin. Sponsors will need to be particularly vigilant about portfolio companies’ publicly-announced net zero targets, decarbonisation plans and transition plans. The new disclosure requirements will bring fresh scrutiny and legal accountability to such commitments. Many private companies are not on track with these plans, says Rivlin, and will need to either adjust or abandon them before going public.

Standardization ahead

Taking a step back, the SEC’s rule is tantamount to a declaration that investors consider climate risks to be financially material risks that affect their investment decisions. This is not a novel view, but it is momentous coming from the regulator of the world’s largest securities exchanges, amid a fiery ESG backlash in the US and a closely-contested election. It will bring standardisation and progress to climate disclosures for both public and private markets.

“The pressure on private companies to disclose isn’t going to go away,” despite the omission of Scope 3 in the final rule, says Kristina Wyatt, a former SEC lawyer and now chief sustainability officer at carbon accounting firm Persefoni. “The [emissions and climate risk] data that will be available over the course of the next few years will just increase in both quantity and quality.”