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Will the SEC climate rule prevent you from getting loans?

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ESG COULD LIMIT AG: Concerns expressed about using SEC proposed environmental, social, and governance (ESG) disclosure standards on calculating climate risks to limit lending to U.S. farms and agribusinesses.
New rule could directly or indirectly discourage banks and credit unions from lending to farmers or agribusinesses in the future.

The U.S. Securities and Exchange Commission recently released for public comment a proposed rule on the disclosure of climate-related financial risk by U.S. companies, including food and agriculture firms, listed for trade on SEC-regulated exchanges. The proposed rule, if finalized and implemented, will enable investors and the companies to allocate investments and tie risk disclosures to corporate plans to respond to the short, medium and long-term physical and transitional risks of climate change.  

With all this administration’s attention on the environment and climate change, this rule has the potential to prohibit banks from lending farmers money if the banks see agricultural operations’ climate risk too high. Although the initial focus is on larger corporations, the potential exists for increased regulation to again come knocking on farmers’ doorsteps, and in this case limiting access to credit.

Publicly-traded companies and other stakeholders have until May 20 to submit feedback for the U.S. Securities and Exchange Commission’s 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 companies’ futures by compelling them to share concrete data about how climate impacts business.

SEC Chair Gary Gensler says that, if adopted, the proposal "would provide investors with consistent, comparable and decision-useful information for making their investment decisions and would provide consistent and clear reporting obligations for issuers." For the largest corporations, three levels of analysis are recommended by the SEC such that direct (scope 1) and indirect (scope 2) greenhouse gas emissions are connected to climate change risk across broad corporate value chains (scope 3).

Senate Republican Whip and Agriculture Committee Member, Senator John Thune, R-S.D., led his colleagues in writing a letter to the President raising concerns about the administration’s proposed use of the financial regulatory system to advance its environmental agenda through the efforts including the proposed SEC rule.

“The viability of farms and ranches across the nation are essential to the viability of rural America and our nation’s food security,” the senators write. “That is why the rhetoric and actions taken by your administration to use the financial regulatory system as a back-door approach to set agriculture policy and advance such overreach is so concerning, as this downward pressure from Washington bureaucrats is not only felt by Wall Street firms, but by our nation’s smallest banks and credit unions as well.”

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 the Republican legislators are concerned that this “push may 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 agriculture communities. “Though since revised, the original draft strategic plan alarmingly recommended credit unions diversify their field of membership and loan concentrations in an effort to mitigate these risks, suggesting that credit unions may want to think twice before lending to their farm and ranch clients,” the letter notes.

The senators write that the banks and credit unions are well positioned to continue responsibly serving their farm and ranch clients, many of which they have served for decades. “Any reduction in lending by banks and credit unions to the agriculture sector – or to any sector that is disliked by its political opponents – would not only harm the businesses themselves, but directly harm consumers due to increased costs of food and energy that would inevitably occur as a result of reduced supply.”

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

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

“Without mandatory, uniform and comprehensive reporting standards, meat and dairy companies will continue to misrepresent total emissions by excluding supply chain emissions and will neither plan nor make investments to reduce those emissions and their financial risks,” IATP says. “For too long, agribusiness and food companies, including global meat and dairy giants, have increased their profits while failing to report their supply chain emissions and hiding from investors the financial risks of that reporting failure.”

Future unclear

About 1,500 U.S. firms already disclose their Scope 3 emissions according to the non-profit CDP. The proposal includes a safe harbor provision, sought by business, to shield companies who may misreport their Scope 3 emissions due to inaccurate or incomplete information from vendors. Agribusiness’ current material risk disclosure on climate currently does not provide the quantitative and granular information that many investors are demanding, IATP says.

“With the proposed rules published, expect a fight as regulators, environmentalists, and companies jostle to shape the final rule through the comment period and beyond,” according to an alert from the Michael Best Strategies law firm.

MBS adds the fight over the rule's future could end up in court: West Virginia Attorney General Patrick Morrisey plus 15 other state attorneys general argued last year the SEC would overstep its authority with new ESG rules, threatening a lawsuit. Business groups like the U.S. Chamber of Commerce and the American Petroleum Institute could throw their support behind this legal battle, MBS adds.

Even without court action, MBS notes a Republican-controlled Congress could also eventually overturn the rule. “Depending on when the administration finalizes the rule and whether Republicans win a veto-proof majority in this year's mid-term election, a Republican congressional majority could in early 2023 roll back the rule under the Congressional Review Act, which allows a new Congress to consider CRA resolutions on rules issued in the last 60 session days of the previous Congress.”

 

TAGS: Farm Policy
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