New Trump Law Seen Boosting Climate Action, Even Outside the U.S. (2)

By Mathew Carr

Dec. 29, 2020-Jan. 2, 2021 — LONDON: A law designed to improve disclosure by companies out of the reach of U.S. financial oversight is seen boosting climate action, potentially sooner than the Paris climate deal.

The Holding Foreign Companies Accountable Act, which came into law Dec. 18 after being signed by President Trump, will require companies, especially those with operations in China, to show who owns them and how they operate. Anti-money laundering laws will also bite at the same time.

Companies, such as those logging in Asia, risk having their access to financial markets cut off, said Tim Williamson, who was a senior renewable energy official in the Obama administration.

Should a company comply with the new laws by providing the 100s of pages of documents required, it’s “more likely to be a legitimate business rather than some nefarious actor that’s trying to do something like log Sarawak without anyone knowing.”

That’s a reference to a state in Malaysia, one of the places where companies have stripped trees at an unsustainable rate. This report from earlier this year underlines how Malaysia and China companies are probably among the culprits of Asia’s murky timber industry: https://api.nationalgeographic.com/distribution/public/amp/science/2020/01/deforestation-in-the-solomon-islands

“In that sense I see it as a big win for governance,” Williamson said of the rules coming in. It would help ensure companies have fewer opportunities to use greenwash.

The Paris climate agreement, on the other hand, is voluntary and so far lacks real teeth.

Borneo

Although China-based Issuers that access the U.S. public capital markets generally have the same disclosure obligations as other non-U.S. issuers, the Commission’s ability to promote and enforce disclosure for China-based issuers is limited.

“As a result, there is substantially greater risk that their disclosures may be incomplete or misleading. In addition, in the event of investor harm, investors generally will have substantially less access to recourse, in comparison to U.S. domestic companies and foreign issuers in other jurisdictions,” the SEC says.

See this: https://www.sec.gov/corpfin/disclosure-considerations-china-based-issuers

In the 18-months ended June 30, 2020, 17 audit firms in mainland China and also Hong Kong signed audit reports for 202 public companies with a combined global market capitalization (U.S. and non-U.S. exchanges) of approximately $1.8 trillion, according to Securities Exchange Commission data.

See a list here where inspections are denied, which includes names such as Sky Solar Holdings, CNOOC:
https://pcaobus.org/oversight/international/denied-access-to-inspections

There’s also a wider push for disclosure of climate risks and the U.S. is likely adopt in phases the recommendations of the global Financial Stability Board’s Task Force on Climate-related Financial Disclosures under President Joe Biden, Williamson said.

Mining companies are among those being blamed for the climate’s deterioration. See this report:

https://www.chathamhouse.org/sites/default/files/2020-10/2020-10-14-minings-impacts-forests-bradley.pdf

Climate change may lead to global economic losses that could mount to $23 trillion per year—permanent damage
that would far eclipse the scale of the 2007-2008 financial crisis, depending on the warming scenario, according to this report:
https://www.americanprogress.org/issues/economy/reports/2019/11/21/477190/climate-change-threatens-stability-financial-system/

That was cited in a letter by Senator Elizabeth Warren, who ran against Biden for the Democratic Presidential nomination, to SEC regulators in August, urging them to tighten climate-disclosure rules:
https://www.warren.senate.gov/imo/media/doc/08.12.2020%20Letter%20from%20Senator%20Warren%20to%20Chairman%20Clayton.pdf

The December SEC rules mean Chinese companies with shares traded in America would be required to use auditors overseen by U.S. regulators or face losing exchange listings. China hasn’t “satisfactorily” allowed the local auditors’ work to be inspected by the board since 2007, the SEC says.

The SEC crackdown and the money laundering rules are set to “help increase environment, social and governance transparency in ways the Paris Agreement probably never could,” Williamson said.

(Updated Tuesday afternoon with SEC context, Saturday with value at risk.)

Outline of new U.S. law here:

Holding Foreign Companies Accountable Act
Became Law Dec. 18, 2020

Requires certain issuers of securities to establish that they are not owned or controlled by a foreign government. Specifically, an issuer must make this certification if the Public Company Accounting Oversight Board is unable to audit specified reports because the issuer has retained a foreign public accounting firm not subject to inspection by the board. Furthermore, if the board is unable to inspect the issuer’s public accounting firm for three consecutive years, the issuer’s securities are banned from trade on a national exchange or through other methods.

Foreign issuers of securities that use such a firm to prepare an audit report must disclose for each non-inspection year

  • the percentage of shares owned by governmental entities where the issuer is incorporated,
  • whether these governmental entities have a controlling financial interest,
  • information related to any board members who are officials of the Chinese Communist Party, and
  • whether the articles of incorporation of the issuer contain any charter of the Chinese Communist Party.

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