Last week, the US Securities and Exchange Commission (SEC) issued a series of long-awaited new climate transparency rules. They are intended to require most listed companies to disclose their greenhouse gas emissions and the climate risks they build up on their balance sheets. The problem: The SEC has watered down the regulations due to intense lobbying from business, which ultimately undermines their effectiveness. This misses an important opportunity to force companies listed on US markets to address the growing threats of global warming.
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The key to the new SEC regulations was the recognition that climate risks are also financial risks. For example, global companies are already facing climate-related supply chain disruptions. Your material assets are vulnerable to storms and your employees are exposed to periods of extreme heat. Your customers may be forced to relocate locations. What’s more, there are fossil fuel-based assets on their balance sheets that they may never be able to sell. And many business models are at least being called into question by climate change.
This isn’t just about companies in the coal, oil or gas sectors. They also include utilities, transport companies, raw material producers, consumer goods manufacturers and even food companies. And investors – all of us – often buy and hold these fossil fuel-linked stocks without knowing it. Investors, policymakers and the general public therefore need clearer and better information about whether and how companies are driving climate change, what they may be doing to combat its effects and what cascading effects could mean for their balance sheets.
Dara O’Rourke is an associate professor and co-director of the Master of Climate Solutions program at the University of California, Berkeley. The picture shows him at the World Economic Forum in Davos in 2011.
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The new SEC rules mandate what was previously essentially a voluntary system of “corporate carbon governance.” They now require companies to provide information about how climate-related risks could affect their business. They must also disclose direct emissions from sources they own or control, as well as their indirect emissions from the production of purchased energy, such as electricity and heat. Crucially, however, companies only have to do this if they classify this information as financially “material.” And that is exactly what gives companies considerable leeway when deciding how transparent they want to be.
Upstream and downstream activities
The original draft SEC rules would also have required companies to report emissions from “upstream and downstream activities” in their value chains. This generally refers to associated emissions from suppliers and customers, which often account for 80 percent of a company’s total climate impact. The removal of this requirement and the addition of the “materiality” standard now appear to be due to strong pressure from corporate groups. After all, the new SEC regulations should help make it clearer how some companies are dealing with climate change and their contribution to it. Out of legal caution, some things may be more financially “significant” than previously thought.
Clearer information will help accelerate corporate climate action, as reputation-conscious firms are likely to feel increasing pressure from customers, competitors and some investors to reduce their emissions. But the SEC could have gone much further. After all, similar measures in the EU are already more comprehensive and strict. Even a California emissions disclosure law signed last October goes further. It requires both public and private companies with revenues of more than $1 billion to report on each category of emissions and then have that data verified by a third party.
Unfortunately, the new SEC regulations merely place companies at the starting line of such a process that would be necessary to decarbonize the economy. The corporations should have been in this race long ago. Voluntary transparency is not very helpful. Companies that operate these have made only minimal progress in reducing their greenhouse gas emissions. The disclosure system on which the SEC regulations are based faces two fundamental problems that limit the scope and effectiveness of carbon disclosure.
First: problems with the data itself. SEC regulations give companies significant latitude in accounting for their emissions, allowing them to set different limits on their carbon footprint, model and measure emissions differently, and even vary them how they ultimately report their emissions. Overall, in the end we will probably only receive company reports about partial emissions from the previous year, without us knowing what a company actually did to reduce its emissions. Second, limitations on how stakeholders can use this data. As can be seen with companies’ voluntary climate commitments, the different reporting standards make it almost impossible to compare companies more precisely. The New Climate Institute warns that it is becoming increasingly difficult to distinguish between real climate protection measures and greenwashing – despite increasing demands for transparency.
Find the main culprits
Investors’ previous efforts to assess CO₂ emissions, decarbonization plans and climate risks through ESG rating systems have only led to more confusion, researchers say. To date, companies have rarely been punished for not clearly disclosing their emissions or not even meeting their own standards. The new SEC climate rules are unlikely to change this untenable situation. Companies, investors and the public need transparency in order to promote positive changes within companies and to be able to evaluate them appropriately from outside.
Such a system must identify the main contributors to business emissions and incentivize companies to make real investments in deep emissions reduction efforts, both within a company itself and throughout its supply chain. The good news is that incomplete rules like the SEC’s can be used as an opportunity to take more meaningful climate action.
The smartest companies and investors are already going beyond SEC regulations. They are developing better systems to identify the causes and costs of carbon dioxide emissions and taking concrete steps to combat them. This is about reducing energy consumption, new, more efficient infrastructure and lower-CO₂ materials, products and processes. This can in turn be good business, because less CO₂ often means lower costs.
The SEC has therefore taken an important, if flawed, first step in getting America’s financial elite to recognize climate impacts and their risks. Regulators and companies themselves must now step up the pace and ensure they provide a clear picture of how fast or slow each industry is moving. Only then will they continue to thrive on a warming planet.
(jl)
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