European investors push US regulator to use ‘double materiality’ in climate disclosure rules

Allianz and Baillie Gifford encourage US regulator to follow EU on disclosure of sustainability impacts

The asset management arm of German insurance giant Allianz has cautioned the US Securities Exchange Commission (SEC) that the pursuit of a narrow approach to materiality around ESG will add to “discrepancies” with other regions such as the EU, which is embedding ‘double materiality’ into its sustainability push.

Responding to the US regulator’s consultation on corporate climate risk disclosures, which closed this week, AllianzGI wrote: “We are convinced that double materiality is key to achieving ESG goals and sustainable finance, and with double materiality being a reality of the EU sustainable finance framework, we also caution that a single materiality approach in other key jurisdictions would add to rather than bridge any discrepancies between different regional ESG ambitions and approaches”.

Double materiality refers to the consideration of the impact companies and investments have on the world in addition to the impact sustainability factors might have on the financial performance of a company or asset. 

AllianzGI, which manages over €500bn on behalf of its clients, describes itself as a “strong proponent” of the “‘double materiality’ principle” in its submission, and added that it regards ‘single materiality’ as “not only an oversimplification but in fact serves to deny the key importance of ESG factors in the investment process”. 

Last month, SEC Commissioner Allison Herren Lee said in a speech that the regulator is not bound by a narrow concept of materiality when creating corporate disclosure rules, including those around ESG and climate change.

“The idea that the SEC must establish the materiality of each specific piece of information required to be disclosed in our rules is legally incorrect, historically unsupported, and inconsistent with the needs of modern investors, especially when it comes to climate and ESG,” she said. 

It was Herren Lee in her then role of acting-Chair of the SEC who announced the launch of its public consultation (in March) on drafting climate risk disclosure rules for US firms.

UK investment management firm Baillie Gifford also encouraged the SEC in its response to follow the EU’s lead on materiality and consider the inclusion of “adverse impact indicators” in its disclosure regime. The reporting on ‘adverse impacts’ is part of the EU’s Sustainable Finance Disclosure Regulation (SFDR), which is designed to increase transparency on how sustainability is factored into investors’ investment processes.  

“We would encourage the SEC to consider the inclusion of these non‐climate related adverse impact indicators as part of the metrics that public companies need to disclose [to the SEC] within the Form 10‐K in addition to the following information: (a) scopes 1, 2 and 3 greenhouse gas emissions (b) relative and absolute emissions reduction targets and (c) avoided emissions,” Baille Gifford wrote. 

More than 250 consultation responses were submitted, including from academics, corporates, asset owners, asset managers, NGOs, consultants, trade bodies and even a central bank in the Bank of Finland. 

Unsurprisingly, corporates such as US oil pipeline firm Enbridge and oil giant Chevron pushed for a narrower interpretation of materiality in their submissions. Enbridge, for example, encouraged the regulator to “remain focused on the purpose of reporting – to provide investors with the information they require in order to understand the company’s business, material risks and opportunities and financial performance”. 

AllianzGI also said in its response to the consultation that it was “supportive” of having a “central repository of all sustainability related data”, such as the EU’s European Single Access Point initiative. 

The creation of such a resource, which would be overseen by a financial markets regulator,  has the potential to “democratise the ESG data market”, AllianzGI said, and would also “likely put a halt to the current situation in which issuers need to provide data to numerous ESG data providers, which in turn sell this information to investors at a high cost”. 

Last year, RI reported that Allianz and S&P Global had teamed up to develop a “non-competitive” platform, named OS-Climate, to house climate datasets and analytics, which would be available for use by the wider market at no additional cost.

US non-profit Ceres also responded to the SEC consultation as part of a large coalition, including US public pension giants New York State Common Retirement Fund and CalSTRS, which laid out what they believe are minimum requirements for any new climate disclosure regime. They include:

  • The SEC’s work should be based on the recommendations of the Task Force on Climate-related Financial Disclosures
  • SEC rulemaking should include industry-specific metrics.
  • Disclosure rules should provide insights into companies’ climate risk exposure, strategies, and scenario planning.
  • Disclosure rules should include Scope 1, 2, and 3 greenhouse gas emissions.
  • Material climate disclosures, including discussion on risk exposure and business opportunities, impacts on strategy, and emissions reporting and management, should be included in annual, quarterly, and other appropriate SEC filings.
  • Regular updates: SEC rules should be updated regularly in response to developments in understanding of climate risks and new metrics.