Taking Stock of the SEC’s Ambitious Climate Agenda

Now that the financial services industry has had some time to digest the 500-plus pages of proposed rulemaking text, compliance experts are offering insight about exactly what the SEC’s climate disclosure regulations entail.

Back in March, the U.S. Securities and Exchange Commission voted to propose key rule amendments that would require a domestic or foreign registrant to include certain climate-related information in its registration statements and periodic reports, such as on Form 10-K.

As summarized by SEC Chair Gary Gensler, examples of the information to be disclosed include climate-related risks and their actual or likely material impacts on the registrant’s business, strategy and outlook. Other information to be disclosed includes the registrant’s governance of climate-related risks and relevant risk management processes, as well as the registrant’s greenhouse gas emissions, which, for accelerated and large accelerated filers and with respect to certain emissions, would be subject to assurance.

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At the time of their introduction, Gensler said the proposed disclosures are similar to those that many companies already provide. He noted that they are based on “broadly accepted disclosure frameworks,” such as the Task Force on Climate-Related Financial Disclosures and the Greenhouse Gas Protocol.

Now that the financial services industry has had some time to digest the hundreds of pages of rulemaking text, compliance experts are offering their insights about exactly what the ambitious regulatory package entails. Included among them is Ethan Corey, senior counsel in Eversheds Sutherland’s investment services practice. He recently sat down with PLANADVISER for a discussion, recounted in Q&A form below, about the most important parts of the SEC’s climate-related rulemaking, and his expectations for what comes next in the at-times complicated rule promulgation process.

PLANADVISER: To kick off the conversation, can you tell us about the pace and tenor of the SEC’s rulemaking activity under the Biden administration?

Corey: What I can say is that it truly has been a busy time for those of us who follow and track the SEC and the other regulators. We have had a lot of regulatory text to read across different topics, from cybersecurity to the climate-related issues. The most recent climate proposal that came out is alone more than 500 pages, so that gives you a sense of the amount of regulatory action that has been taking place.

One month after it issued proposed regulations related to the cybersecurity policies of registered investment advisers and fund companies, the SEC issued a second proposal related to the cybersecurity standards and disclosures of publicly traded companies. These come after a busy 2021, as well, which saw proposed regulations issued on topics such as securities lending and money market funds.  

So, as a team, we have put out various client alerts on these topics, and we have been speaking with a lot of our clients, answering their initial questions and helping them with their own comments for regulators. It has been very busy.

PLANADVISER: What is your initial impression of the latest climate-related disclosure regulations? Is this one of the most ambitions regulations the SEC is working on?

Corey: Overall, I think this proposal is a really big deal. Not only does the actual rule text itself include many new requirements for registered entities, but the list of ancillary questions that the SEC included in the package is also expansive. I think this demonstrates that a final version of the proposal, if and when it comes out, could include even more than what is already in the proposal.

If we assume that this package gets adopted in something like the current form, then it will be a major change for the marketplace. We can expect there will be lawsuits challenging the viability of the regulations on various grounds, but for the sake of discussion, let’s assume it survives the legal challenges.

I think it is fair to say that the proposal would, if enacted, deliver more information about investors’ current and future climate risk exposure, but there would also be potential unintended consequences, from my point of view. One of these is that some companies in sectors that are most exposed to climate-related risk, for example energy companies or heavy manufacturers, may actually decide that it would be better for them to transition from public to private ownership.

This may sound a bit extreme, but I do believe it is likely. We could see the types of leveraged buyouts that were popular in the 1980s and 1990s becoming popular again, especially in these industries. As a general matter, this trend would be likelier to hit energy suppliers, manufacturers and goods companies more than it would service industries.

PLANADVISER: What do you make of the SEC’s strategy of requiring companies to disclose certain information related to climate-focused risk assessments, as opposed to the idea of mandating that they collect such information in the first place?

Corey: It is hard to get inside the mind of the commissioners and to make statements about exactly what their intentions are or why they have followed a certain strategy. In terms of why they are not somehow seeking to mandate the collection of climate-risk information, perhaps the SEC expects organic market forces to push firms to generate such information on their own. It’s hard to say; it’s just speculation at this point.

It very well may be that there is already critical mass of registrants who are already doing this and collecting such information, and that the SEC feels it is unlikely that they would merely stop doing this data collection in response to the idea that it will now have to be made public. I think there is some truth to that.

Of course, if you are a firm that has been on the fence about adopting some of these practices for your business, you might see this proposal and just decide it is not worth the hassle. Especially if you work in an industry that faces significant climate-related challenges in the long-term future, if your reward for going ahead and doing this analysis is to have to put negative data into your registration statements and disclosure documents, you might just skip the whole process. In that sense, paradoxically, the proposal may discourage some people from engaging in these climate-risk assessment practices.

PLANADVISER: What did you make of the SEC’s own internal debate about the proposal, which was put on full display during the public vote on the proposal?

Corey: That’s an interesting question, and it makes me think of the history of the SEC and how the regulator has changed over the decades. Though it was always a part of the SEC’s process, I think the current elevated level of public dissent is something that first started to develop during the leadership of former SEC Chair Jay Clayton, under former President Trump, and it has continued now that the ideological makeup of the majority of commissioners has again flipped under President Biden.

It used to be that the SEC was much more of a collaborative body, and generally we would see 5-0 or 4-1 votes on almost every proposal. Since the Clayton era, it has become a 3-2 body, and on both sides there appears to be less of an effort made towards finding middle-ground policies that can be supported by both sides. Frankly, it’s another sign of how so many things in Washington, D.C., have broken down on partisan lines.

PLANADVISER: I imagine you expect a significant number of public comments? Any predictions about what they will say?

Corey: It is going to be a large and mixed bag of comments. I think we can, for obvious reasons, expect that manufacturers and energy companies are going to give a lot of push back. The U.S. Chamber of Commerce, as a collective entity, will likely push back. The environmentalist community will obviously be in favor. What will be more subtle and interesting will be the responses of the investment and finance community, and I think those may be mixed.

Interestingly, we have seen the Investment Company Institute already file a statement that is broadly in favor of the proposal. Overall, I think investor groups are largely going to be positive about this, because right now, they are very dependent on third-party information and surveys when they are trying to assess things like the climate risk of a given stock issuer or industry.

I should say, however, that I still don’t think this proposal, as ambitious as it is, will truly allow the industry to reach a point of complete comparability in terms of climate-related data and disclosures. This is just such a complex area, and I suspect you could see situations where you have two similarly situated businesses where, say, one is vertically integrated and the other isn’t. It appears that the vertically integrated business will be reporting more scope 1 and scope 2 emissions that are generated directly by the company, while the other may be reporting a lot more scope 3 emissions generated by a supplier. This could cause the companies to appear to be different from a climate-risk perspective while they are in reality using the same equipment and putting off the same emissions. How would you handle that as an investor?

New OneDigital Adviser on Succession, Growth and More

For one advisory shop, the start of discussions about succession planning quickly led to deeper questions and, eventually, a major step forward for the firm and its staff.

Founded in 1999 and located in Basking Ridge, New Jersey, the advisory firm Gouldin & McCarthy prides itself on its focus on personal financial planning and retirement plan consulting for small to medium-sized companies.

As recounted in the following Q&A discussion with Michael Gouldin, a founding partner and senior vice president, the firm’s professionals aim to bring peace of mind to employers and individuals alike. He says the firm’s recent acquisition by OneDigital will allow his team to build on its longstanding vision of bridging the divide between traditional wealth management and corporate retirement planning, while also solving big questions about succession planning and scalability.

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PLANADVISER: Can you please tell us about your motivations for founding Gouldin & McCarthy, particularly with respect to the vision of doing both wealth management and corporate retirement planning?

Gouldin: Originally, I actually wanted to serve individuals and be that traditional high net worth wealth manager, but this was back in the mid-1990s. At that time, I was a young professional, and I didn’t have any gray hair—yet—so the types of clients I was targeting were frankly not very interested in having me do their wealth management.

So, I looked around and saw that there was another emerging path and started calling business owners to offer to work on their 401(k) plans. At the same time that I was getting some of my first corporate clients, I could already see that this was a soft entry point to eventually help people deal with personal wealth assets, based on the trust I could build on the retirement plan services side.

I think we had our early success in part because we started talking about fee transparency and value-for-fees before it was cool. That was our play to get in the door at a company: ‘You are paying all these fees and the adviser isn’t doing very much for you.’ It was a real value play. That was the source of trust and growth for our business.

PLANADVISER: How has your staff grown and changed since the founding?

Gouldin: The first partner to come on board was Dan McCarthy—in fact he is my brother-in-law. Early on I convinced him to join the business and we’ve worked together since.

When Dan came on board, he took over as the lead on the servicing and care of the corporate clients, while I continued to do the overall sales and worked on the individual clients. That’s how we were able to build a diverse business, and we had a handful of additional folks come on over the years to support us.

I will say, partly due to luck but also because of our initial vision, we have been fortunate to build out what everyone is trying to build out now through mergers and acquisitions—which is the opportunity to have complementary business lines across retirement plans and individual wealth management. I would like to say that I’m a genius and saw this vision from the beginning, but frankly, that’s not the case.

There was a method to the madness, of course. We would go to the industry conferences and see that those who were doing only 401(k) plans or only wealth management were missing something.

PLANADVISER: When did you start to think about things like succession planning and the longer-term future of your firm?

Gouldin: I would say that, by the time we got to two or three years ago, we started thinking in earnest about succession planning, and at the same time we started reflecting and thinking about where we wanted to be, growth-wise, in another 10 or 15 years. These conversations were very much linked, in our case. For us, the succession discussion started with long-range planning. It wasn’t anything urgent, which made the process much less stressful and, in the end, more successful.

So, I am 52 at this point, and my partners for the most part are in the same age range. I say that to underscore that we could have perpetuated this firm as an independent entity for a long time. We also have a business leader who is in his late 30s, so the possibility of purely internal succession planning was there. However, the answers to the questions about growth and scalability in an increasingly competitive industry were not.

PLANADVISER: Is this why the discussion of the M&A option came up?

Gouldin: In a way, yes. It’s a bit of a funny story. I was actually listening to a podcast that featured the firm Wise Rhino Group and their leader Dick Darian, who is well known to your readers. He was talking with the other guests about the positioning of these firms that are looking to create a bridge between corporate retirement planning and wealth management. I was really inspired, because the vision he was describing really sounded like the vision we already have, but what we had been doing over the years was on a more micro scale compared to the strategic, serial acquirers.

I called Dick and we had a few discussions, and we eventually engaged Wise Rhino Group just to do a business evaluation and to talk about growth and succession. In that process, we got real about succession planning, growth opportunities and M&A options. Long story short, when we ultimately met OneDigital, it was immediately apparent that we had found a fit for the future of our firm and our staff.

In terms of our staff and our partners, this has been quite a journey—because remember, we didn’t necessarily start this process with the expectation of doing a sale so soon. However, the whole team shares our enthusiasm, and we’ve all had the chance to meet and hear from the folks at OneDigital. They have the same corporate culture that we have and the same vision for the future. That’s so important, and it is really exciting.

I’m gratified that our staffers now have the opportunity to grow professionally in a way that they simply might not have been able to do in a small independent advisory shop. At OneDigital there are more than 3,000 employees, and there are job opportunities all over the place. We told our people that we absolutely want them to develop professionally and do the best for themselves at our new firm.  

The benefits to the practice itself are going to range from deeper technical expertise to cross-selling opportunities. Aligning with OneDigital will allow us to continue to build on our expertise with a high-touch client service model to offer world-class service and expertise—for the decades to come.

PLANADVSER: Looking ahead, what challenges do you foresee for your firm and your industry peers?

Gouldin: The fundamentals of the advisory business remain very promising. There is so much need for the types of services and expertise that retirement plan advisers have. On the other hand, some obvious challenges come to mind. For example, regulatory challenges are always going to be an issue in this industry.

Any practicing adviser can tell you there is a lot of overlap, and even competition, between the regulators we must answer to. We always need to work to make sure we are understanding the evolving regulatory requirements and ensuring our regulators understand why what we do is so important.

From a strategic standpoint, we need to ensure that the scalability we all talk about is really there—that we can provide individualized and personal services in a world that is increasingly digital. It’s going to be a balance. People want everything via their smart phone, but they also want easy access to individual, human support. It’s a balance, and getting that balance right is so important.

On paper, a firm can scale indefinitely with robo-based services, but that’s not what the future looks like—without the human touch. There’s always some hand-holding that is going to be needed. You have to have both great people and great technology.

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