SEC climate disclosure proposal could provide benchmark for muni market

The Securities and Exchange Commission’s climate disclosure proposal may provide a benchmark for regulators and issuers as both consider how best to assess and disclose climate risks.

The much anticipated SEC climate disclosure proposal, which is set to become a hallmark of SEC Chairman Gary Gensler’s tenure, only applies to public companies and would only affect corporate issuers, as a result of a federal law preventing the SEC from requiring pre-issuance disclosures from muni issuers.

“This is indirectly very significant for the municipal bond market,” said Chuck Samuels, member at Mintz Levin and counsel for the National Association of Health & Education Facilities Finance Authority.

“It’s obviously one of the most significant regulatory actions that this administration has taken,” said Chuck Samuels, member at Mintz Levin and counsel for the National Association of Health & Education Facilities Finance Authorities. “It was a key part of their environmental platform and, clearly, Chairman Gensler is determined to satisfy the commitments that were made by the President to take this action specifically.”

“It does not directly affect us but it certainly indirectly affects us in the sense that an awful lot of work has gone into thinking about these issues,” Samuels added. “And that work, to some extent, is absolutely going to apply to any future activities in the municipal bond space.”

The proposal would require companies to disclose information about their greenhouse gas emissions, indirect emissions from purchased electricity or other forms of energy, and greenhouse gas emissions from upstream and downstream activities in the value chain.

“The proposed disclosures are similar to those that many companies already provide based on broadly accepted disclosure frameworks such as the Task Force on Climate-Related Financial Disclosures and the Greenhouse Gas Protocol,” the SEC said.

The 510-page proposal is subject to comments, open 30 days after publication in the Federal Register, or 60 days after the date of issuance, whichever is longer. That, coupled with almost certain litigation on this matter, will force the Commission to examine these proposals for months, in addition to allowing corporations time during their phase-in period.

But even if the Commission did consider specific rules or regulations for the muni market on ESG, they’ll likely look different than they do for corporations, but the underlying concepts will likely remain the same.

“If the SEC were to move forward with a climate related disclosure initiative in the municipal market, I think we can guess that it would be different from what we’ve seen for corporate issuers, because the Commission’s authority just isn’t as broad with respect to municipal issuers,” said Michael Decker, senior vice president of policy and research at Bond Dealers of America. “But the proposal yesterday does give a sense of the kinds of issues that the commission is thinking about in the context of climate disclosure.”

A bond lawyer who asked not to be identified in order to speak freely said there is already work underway looking at how the Commission views materiality within the context of this proposal and how it could apply to municipal issuers going forward.

Materiality, defined by courts as information a reasonable investor would consider important when making an investment decision, is the defining feature of required disclosure in an anti-fraud context.

But some issuers say that while the ESG conversation is important, municipal issuers are already deciding what is material to them and what makes the most sense to disclose, even without any formal rules from the SEC or Municipal Securities Rulemaking Board.

“Better disclosure for maybe some climate risk factors is needed,” said Dave Erdman, capital finance director for the State of Wisconsin. “But this is something along with many other things in the ESG complex that the national market will address.”

“Really no need for regulations,” he added. “This is something that the market will work together to sufficiently address going forward.”

Erdman credits the MSRB’s recent request for information for spurring the conversation on the topic and getting municipal issuers to come forward on what disclosures make the most sense for them.

“Improved disclosures on the municipal level, all come together just through time and municipal market participants working together,” Erdman said.

But how the MSRB responds to its RFI, which will come after the MSRB’s quarterly board meeting on April 27-28 and is expected to take the SEC’s proposal into consideration, will provide the next steps on how the muni market deals with ESG considerations.

“As an issuer, I look forward to working with the MSRB to answer any questions or further address any topics that were identified in that RFI that need further discussion and further attention,” Erdman said.

But how this strategy pans out long term for t Gensler and President Biden, who’ve made it a hallmark of their climate strategy, may depend on re-election efforts.

“This is indirectly quite significant,” Samuels said. “Particularly depending on how it plays out, how long this administration stays in power, etc.”


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