The US Securities and Exchange Commission recently published for public comment a proposed rule on climate-related financial risk disclosure by US companies, including food and agriculture companies, that are listed on exchanges regulated by the the SEC. The proposed rule, if finalized and implemented, will allow investors and companies to allocate investments and link risk disclosures to corporate plans for responding to short-, medium-, and long-term physical and transition risks from climate change.
With all of this administration’s focus on the environment and climate change, this rule has the potential to prohibit banks from lending money to farmers if the banks deem the climate risk of farming operations to be too high. Although the initial focus is on the largest corporations, there is the possibility that further regulation will once again knock on farmers’ doors and, in this case, limit access to credit.
Publicly traded companies and other interested parties have until May 20 to submit comments to the US Securities and Exchange Commission. proposed environmental, social and governance disclosure standards published on March 21. The proposed rules don’t ask companies to reduce their climate impact, but they could shape the future of companies by forcing them to share hard data about how climate affects business.
SEC Chairman Gary Gensler says that, if adopted, the proposal “would provide investors with consistent, comparable and useful information to make investment decisions and provide consistent and clear reporting obligations for issuers.” For larger corporations, the SEC recommends three levels of analysis, so that direct (scope 1) and indirect (scope 2) greenhouse gas emissions are connected to climate change risk in broad corporate value chains ( scope 3).
Senate Republican Whip and Agriculture Committee member Sen. John Thune, R.D., led his colleagues in drafting a letter to the President raising concerns about the administration’s proposed use of the financial regulatory system to advance its environmental agenda through efforts including the SEC’s proposed rule.
“The viability of farms and ranches across the country is essential to the viability of rural America and the food security of our nation,” the senators write. “That is why the rhetoric and actions taken by your administration to use the financial regulatory system as a backdoor approach to setting farm policy and promoting such overreach are so troubling, as this downward pressure from bureaucrats of Washington is not only felt by Wall Street. businesses, but also by our nation’s smaller banks and credit unions.”
The letter notes that actions taken by some in the administration, accompanied by activists’ broader narrative on environmental issues, “are undoubtedly already leading to reduced lending to certain sectors, such as fossil fuels.” The letter adds that Republican lawmakers are concerned that this “push could eventually directly or indirectly discourage banks and credit unions from lending to farmers, ranchers and other agribusinesses.”
The letter cited the National Credit Union Administration’s “Draft Strategic Plan 2022-2026,” which included language about the adverse effect of changing weather patterns on farming communities. “Although since it was revised, the draft of the original strategic plan alarmingly recommended that credit unions diversify their field of membership and concentration of loans in an effort to mitigate these risks, which suggests that credit unions credit should think twice before lending to their agricultural and ranching clients”, the letter notes.
The senators write that banks and credit unions are well positioned to continue to responsibly serve their farm and ranch customers, many of whom they have served for decades. “Any reduction in lending by banks and credit unions to the agricultural sector, or to any sector disliked by their political opponents, would not only harm the businesses themselves, but would directly harm consumers due to increased prices. food and energy costs that will inevitably occur as a result of reduced supply.
The rule also has the potential for activists to push their agricultural agenda as well.
The proposed rule includes annual reporting of weather financial risks to meet the SEC’s mandate to protect investors from harm due to undisclosed risks and to prevent disruption of the capital markets from failure to disclose information required by the SEC. investors and regulators. According to the Trade and Agriculture Policy Institute, the final rule should cover the quarterly release of supply chain emissions, or “Scope 3 emissions,” related to what they called “factory farms,” including methane-specific reporting. .
Without comprehensive, uniform and mandatory reporting standards, meat and dairy companies will continue to misrepresent total emissions by excluding supply chain emissions and fail to plan and make investments to reduce those emissions and their financial risks. . “For too long, food and agribusiness companies, including global meat and dairy giants, have increased their profits without reporting emissions from their supply chain and hiding from investors the financial risks of that supply chain failure. Informs presentation”.
Some 1,500 US companies already disclose their Scope 3 emissions according to the nonprofit CDP. The proposal includes a safe harbor provision, sought by companies, to protect companies that may misreport their Scope 3 emissions due to inaccurate or incomplete information from suppliers. Current disclosure of material agribusiness climate risks currently does not provide the quantitative and granular information that many investors demand, says the IATP.
“With the proposed rules out, expect a fight as regulators, environmentalists, and businesses scramble to shape the final rule during the comment period and beyond,” according to an alert from law firm Michael Best Strategies.
MBS adds that the fight over the future of the rule could end up in court: West Virginia Attorney General Patrick Morrisey and 15 other state attorneys general argued last year that the SEC would overreach its authority with the new ESG rules., threatening a lawsuit. Business groups such as the US Chamber of Commerce and the American Petroleum Institute could support this legal battle, MBS adds.
Even without court action, MBS notes that a Republican-controlled Congress could also strike down the rule. “Depending on when the administration finalizes the rule and if Republicans win a veto-proof majority in this year’s midterm elections, a Republican majority in Congress could overturn the rule in early 2023 under the Review Act. of Congress, which allows a new Congress to consider the resolutions of the CRA on regulations issued in the last 60 days of the session of the previous Congress.”