The SEC & Climate Reporting Flows Downhill
The SEC has spoken – finally.
Last week, the Securities and Exchange Commission unveiled its 886-page climate-reporting rules, and there’s plenty to disappoint almost everyone.
The environmentally minded (like me) are unhappy that the SEC dropped the Scope 3, supply-chain and end-user greenhouse gas emissions reporting requirement. Scope 3 emissions comprise 70 percent or more of a company’s carbon footprint so any accounting that omits this is wildly incomplete. Industry fueled by conventional, carbon-heavy fuels claim the SEC is swimming into environmental deep waters when it should stay in the shallower areas of finance where the investment community has been able to see the bottom. And I have to believe that SEC Chair Gary Gensler and his cohort are fending off attack because the first 100 or so pages read like a playbook for defending court challenges to the rules. (I’m slogging through the rest.) Mr. Gensler seems to be broadcasting the arguments for how to swat away legal challenges about perceived regulatory overreach.
And to be sure, the attacks are coming already. In the first few days since the new rules went into effect, 13 states have filed legal challenges, saying that the SEC is out over its skis and that it must have clear congressional guidance before issuing such directives. State litigants include Texas, Louisiana, Mississippi, West Virginia, Georgia, Alabama, Alaska, New Hampshire, Indiana, Oklahoma, South Carolina, Wyoming and Virginia.
“Carbon-heavy activities are dirty, dusty, dangerous and expensive.”
In a nutshell, the landscape of voluntary climate reporting has been a bust – of poor quality, based on doubtful and variable data, almost impossible to compare report to report and insufficient to really suss out actual climate risks. In codifying these new rules, the SEC is seeking to offer “consistent, comparable, and reliable disclosures for investors.”
The need for climate-risk assessment and reporting out has come into sharp focus recently as climate change has worsened and other regulators across the globe zoom ahead with similar requirements. In his 2020 “Letter to CEOs,” BlackRock Chairman and Chief Executive Officer Larry Fink wrote that “climate risk is investment risk.” In other words, companies failing to address the risks a changing climate poses add (possibly significantly) to the risk profile of their organizations, longevity and profitability.
Even though it caught flak because companies said they have no continuing input, the SEC leans on several standards and frameworks that have been used in reporting for years – the CDP (formerly Carbon Disclosure Project), the GHG Protocol, XBRL (for electronic report tagging) and the TCFD (Task Force for Climate-related Financial Disclosures).
The TCFD asks reporting companies to explore potential climate risks through scenario analysis, a tool used to gauge probabilities of portfolio value prognostications, impacts and likelihood. TCFD identifies six risks in two broad categories (transition and physical) and on the upside, five opportunities that can come, too (see figure at right).
Assuming greenhouse gas emissions and climate-risk reporting remain in place, what’s left to compel a fuller picture of climate and carbon risk are materiality, macro trends and stakeholder demands. Again, Mr. Fink:
Stakeholder capitalism is not about politics. It is not a social or ideological agenda. It is not “woke.” It is capitalism, driven by mutually beneficial relationships between you and the employees, customers, suppliers, and communities your company relies on to prosper.
One big stakeholder group – clients and buyers – is now requiring a fuller carbon-accounting – government entities. The federal government’s purchasing department, the GSA (General Services Administration) has aggressive environmental goals, including purchasing 100 percent clean electricity by 2030, icing out ICE vehicles (internal combustion engines) and net-zero energy on government buildings greater than 5,000 square feet with 40 percent of designs net-zero by 2025. Plus, two-thirds of state governments have climate-action plans that include deep cuts in carbon (see map below).
U.S. State Climate Action Plans (https://www.c2es.org/content/state-climate-policy/)
In addition to government entities vanquishing carbon, companies with net-zero goals will have to do it, too – big time. And since that 70 percent of a company’s carbon emissions reside up and down its supply chain, companies are already shoving that heavy lift downhill onto suppliers. (Read, whether you care about your GHGs or not, especially if you’re a small or middle-market business, your clients very well may.)
As TCFD said, carbon risk looms larger and larger. Markets for heavy-carbon anything are already shrinking, and ignoring these trends practically guarantees you’re losing competitive edge. And if your clients work internationally, they most certainly focus on supply-chain emissions as international governments pursue their own carbon-reduction goals and erect carbon gatekeepers at their borders, something the European Union is putting in place.
The SEC requires big, public companies to report on climate risk and greenhouse gas emissions, yet those companies may look down the supply chain for their vendors to report truthfully and transparently.
My carbon-accounting professor said, “Carbon is dirty, dusty and dangerous.” And I would add expensive. Even if you think accounting for GHG emissions is a sop to enviros, your clients may need you to help them reduce their value-chain emissions. If that’s the case, you’re in the carbon and climate-risk game.
We are not legal, accounting or financial professionals, and we are not offering that type of advice here. Please consult with licensed, certified professionals to discuss your particular situation.