Will the SEC’s climate rule prevent you from getting loans?

The U.S. Securities and Exchange Commission recently released for public comment a proposed rule on disclosure of climate-related financial risks by U.S. companies, including food and agriculture companies, listed for trading on stock exchanges. regulated by the SEC. The proposed rule, if finalized and implemented, will allow investors and companies to allocate investments and link risk disclosure to business plans to address physical and transitory risks in the short, medium and long term. of climate change.

With 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 consider the climate risk of farms to be too high. Although the initial focus is on large corporations, it is possible that increased regulation will once again knock on farmers’ doors and, in this case, limit access to credit.

Publicly traded companies and other stakeholders have until May 20 to submit comments to the U.S. Securities and Exchange Commission. proposed environmental, social and governance disclosure standards published on March 21. The proposed rules do not ask companies to reduce their climate impact, but could shape the future of companies by requiring them to share hard data on the impact of climate on business.

SEC Chairman Gary Gensler said that, if adopted, the proposal “would provide investors with consistent, comparable and useful information to make their investment decisions and provide consistent and clear reporting requirements for issuers.” . For larger companies, three levels of analysis are recommended by the SEC, so that direct (scope 1) and indirect (scope 2) greenhouse gas emissions are linked to climate change risk in large chains company value (scope 3).

Republican Senate Whip and Agriculture Committee Member, Sen. John Thune, RS.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’s why the rhetoric and actions taken by your administration to use the financial regulatory system as a back door approach to setting agricultural policy and advancing such overreach is so concerning, because this downward pressure from the bureaucrats of Washington is not only felt by Wall Street companies, but also by our nation’s smaller banks and credit unions.

The letter notes that the actions taken by some members of the administration, along with 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 “surge could 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 effects of changing weather patterns on farming communities. “Although since revised, the original draft strategic plan alarmingly recommended that credit unions diversify their membership scope and lending concentrations in an effort to mitigate these risks, suggesting that credit unions will want to perhaps think twice about lending to their farm and ranch clients,” the letter notes said.

The senators write that banks and credit unions are well positioned to continue to responsibly serve their farm and ranch customers, many of whom have served for decades. “Any reduction in bank and credit union lending to the agricultural sector – or any sector hated by its political opponents – would hurt not only the businesses themselves, but directly consumers through rising food and food costs. of energy which inevitably arise due to reduced supply.

The rule also has the potential for activists to advance their agricultural agenda.

The proposed rule includes an annual climate-related financial risk report to fulfill the SEC’s mandate to protect investors from harm from undisclosed risks and prevent disruption of financial markets through failure to disclose information required by investors and regulators. According to the Institute for Agriculture and Trade Policy, the final rule should cover the quarterly release of supply chain emissions, or “Scope 3 emissions,” related to what they called “factory farms,” including including the specific declaration of methane.

“Without mandatory, uniform and comprehensive reporting standards, meat and dairy companies will continue to distort total emissions by excluding supply chain emissions and will not plan or make investments to reduce these emissions and their financial risks,” says the IATP. “For too long, agribusinesses, including global meat and dairy giants, have increased their profits while failing to report their supply chain emissions and hiding the financial risks of this failure from investors. statement.”

Uncertain future

About 1,500 U.S. companies already disclose their Scope 3 emissions according to the nonprofit CDP. The proposal includes an exemption 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 require, according to IATP.

“With the proposed rules released, 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 rule’s future could end up in court: West Virginia Attorney General Patrick Morrisey, along with 15 other state attorneys general, argued last year that the SEC would overstep its authority with new ESG rules., threatening legal action. Business groups like the American Chamber of Commerce and the American Petroleum Institute could lend their support to this legal battle, adds MBS.

Even without legal action, MBS notes that a Republican-controlled Congress could also possibly overturn the rule. “Depending on when the administration finalizes the rule and if Republicans win a non-vetoing majority in this year’s midterm elections, a Republican majority in Congress could in early 2023 override the rule under the Congressional Review Act, which allows a new Congress to review CRA resolutions on rules issued during the last 60 sessional days of the previous Congress.

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