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August 11, 2022

SEC’s proposed climate disclosure regulation may impact private companies

The US financial market regulator’s proposal for listed companies to disclose their climate-related risks may have the knock-on effect of listed alternative asset managers having to disclose the emissions of their underlying private companies.

Earlier this year, the US Securities and Exchange Commission proposed requirements for the country’s listed public companies to disclose information on climate-related risks. This would include reporting of companies’ Scope 1 and 2 emissions, and Scope 3 emissions’ categories.

While this regulation applies to listed companies, it may have an inadvertent effect on some private companies. US listed alternative investment managers such as Blackstone, KKR and Carlyle Group manage private companies in their portfolios, so compliance with SEC rules would mean also having to disclose the emissions footprints of their underlying companies. 

New research from MSCI, which uses data from Burgiss, finds this could bring climate transparency to 11 per cent of global privately held markets. While this might seem small, it is still a meaningful total of around $594bn out of the world’s estimated $5.4tn of privately held assets. 

Reporting Scope 3 emissions

MSCI found that 99 per cent of listed alternative asset managers’ emissions count as Scope 3 Category 15 emissions in their financial reports.

Scope 3 emissions are a consequence of the activities of the reporting organisation but occur from sources not owned or controlled by it, such as suppliers or distributors. Category 15, also known as financed emissions, covers emissions associated with a company’s investments, including equity investments, debt investments, project finance, and managed investments and client services. 

Rumi Mahmood, vice president at MSCI Research, predicts that as a result of listed alternative asset managers having to report on their Scope 3 emissions, there will be increased engagement between these managers and their underlying portfolio companies. 

There may be increased demand from such asset managers for the private companies in their portfolios to disclose their emissions, says Mahmood, and they might “increase their influence on their private companies to develop sufficient reporting and disclosure mechanisms”. 

Additionally, SEC rules could impact private companies outside the US. Mahood adds: “Even though this SEC ruling is US focused, the knock-on effect could also go to companies that are more global in nature. This is because US listed alternative investment managers’ portfolios hold companies that operate in other regions globally as well.” 

MSCI found the Pacific region has the greatest share of private capital affected, at 14 per cent; followed by Europe (12 per cent); North America and Asia (both 10 per cent); Latin America (7 per cent); and the Middle East and Africa (4 per cent).

Decreasing investment

The MSCI research estimated that listed alternative asset managers were more exposed to companies that had a higher-weighted average carbon intensity than companies held by private alternative asset managers, based on estimates of Scope 1 and Scope 2 carbon intensities.

Listed alternative asset managers had greater exposure to companies with carbon intensities in the ‘very high’ band (exceeding 525 tonnes CO₂ per $mn of sales), which is largely attributed to energy, materials and utilities. 

In contrast, the distribution of carbon intensity estimates for private alternative asset managers was skewed toward the ‘very low’ band (less than 15 tonnes CO₂ per $mn of sales), with companies typically in the information technology and communication services sectors.

However, this might be changing as the share of investment flow by listed alternative asset managers to carbon-intensive companies appears to be decreasing. 

In the fourth quarter of 2021, nearly a fifth of listed alternative asset managers’ long positions in the 10 most carbon-intensive sub-industries were from investments that originated in the 2008 to 2014 period, compared to less than 10 per cent in the case of their privately-owned peers.

But by the 2015 to 2021 period, listed alternative managers had noticeably reduced the investment flow share to the most carbon-intensive sub-industries at a faster rate than their private counterparts, according to MSCI.

Mahmood says: “What may transpire is that the listed managers would have more to disclose compared to their private counterparts, so they may be deemed as more transparent – even though [this trend] may be regulation driven.”

A service from the Financial Times