Back in 2020 we wrote that around 7,000 large companies had begun voluntarily reporting greenhouse gas emissions (GHG) and other environmental data to the non-profit Carbon Disclosure Project (CDP). The problem? More than 230,000 other companies had not. As the process was purely voluntary, there was little to be done.
But soon, with a tap of the SEC Chairman’s gavel, all public companies may be compelled to do so, and more. The SEC’s new proposed rule will mandate scope 1, 2, and (with exceptions) scope 3 GHG reporting. It will also require a full accounting of other climate-based investor risks and “how climate risk will affect their strategy, outlook, financial statements and business from the near-term to the long-term.” The rule would take effect quickly, in fiscal 2024 or 2025, though there are some built-in extensions for smaller reporting companies (SRC).[1]
“We believe,” the SEC explains, “that the current disclosure system is not eliciting consistent, comparable, and reliable information that enables investors both to assess accurately the potential impacts of climate-related risks on the nature of a registrant’s business and to gauge how a registrant’s board and management are assessing and addressing those impacts.”
Drum sextant and compass, at the Sjøfart Museum, Oslo, Norway.
Photo by Fanny Schertzer. Source: Wikimedia Commons
As a result – if enacted – public companies must, for the first time, measure and report their specific GHG outputs and climate-related business risks. In another first, they will do so using a consistent reporting framework, a concern that has dogged voluntary reporting since its inception.
“The SEC has been calling companies out for saying in their ESG or sustainability reports, ‘climate is a big risk, it’s a massive impact on our business,’ but not saying that in their [IRS form] 10-K,” said Phil Clawson, Director, Sustainability & Social Impact at AMN Healthcare in Dallas. Indeed, the commission has complained of such discrepancies and this action is, in part, intended to align them.
But aside from better informing investors, this will make it easier for companies to do things the sustainability community has long been screaming for: quickly formulating and working towards meaningful science-based targets (SBT); planning effective sustainability strategies; and bringing sustainability into C-suites and boardrooms for keeps.
Photo by Rido81
Meanwhile, it will translate into long nights for those responsible for compliance, especially for thousands of firms who haven’t voluntarily done such analyses before. And as proposed, there’s little time to prepare. The SEC’s “reasonable amount of time to comply,” begins in about a year and a half.
As such, there’s likely to be a scramble to gather and collate appropriate data. While there are several companies and platforms specializing in such measurements, the brunt will fall on Chief Sustainability Officers (CSOs) and equivalent positions. Therein lies another challenge: last year, the Weinreb Group listed only 95 CSOs in the United States. The 4,000 public [2] companies that will fall under the SEC’s new rule, currently ill equipped, will be hungry for talent at that position.
Capacity will be strained and, historically, budget requests for sustainability projects have been tough to get approved. However, sustainability director Clawson chuckled, “though additional resources will be necessary to comply with the rule as currently envisioned. – technology, auditing, help with data capture and quality – it’s easier to make a business case for it if it’s mandated by SEC.”
Photo by Immo Wegmann / Unsplash
Indeed, the detailed measurement and analysis needed may be what finally causes business to, as we wrote in 2019, bring sustainability onto the top floor. As TechTarget points out, without trained professionals in these positions, “the reporting task will fall to a business’s legal counsel or the chief financial officer.” Such people are competent in their lanes, but measuring various global warming potentials (GWP) of GHGs across company operations, and surfacing the risks posed to global supply chain by climate change, are not the stuff of financial statements or legal briefs.
In part for this reason, the rule would also hold directors responsible for compliance. It would even require that companies identify, by name, the specific “board members or board committees responsible for the oversight of climate-related risk.” To this point, climate expertise has not been common in the boardroom and most companies will need some creativity to meet that rule.
“In our case there are no actual experts on the board,” said Clawson. “We’re growing board expertise, training board expertise.” His company isn’t alone: a 2018 survey found that “of the 1,188 Fortune 100 board members, only 6% had environmental credentials,” while the National Association of Corporate Directors (NACD) calculates the majority of directors fall short, with just 24 percent of public company and 13 percent of private company directors participating in educational activities related to ESG in the last 12 months.”
Photo by Vaughn Smith / Pixabay
Between C-suites and boardrooms, it should be a lively couple of years for execs with sustainability chops.
The rule drew its approach primarily from two extant sources: the Greenhouse Gas Protocol (GHG Protocol), “a leading accounting and reporting standard for greenhouse gas emissions;” and the Task Force on Climate-Related Financial Disclosures (TCFD), “a climate-related reporting framework that has become widely accepted by both registrants and investors.”
For many firms, scope 1 and 2 emissions are relatively straightforward affairs, which is handy with disclosure dates as close as 2023. Scope 3, however, is considerably tangled. The proposed rule acknowledges this with 2024 disclosure for scope 3, and SRCs – non-investment, non-subsidiary companies with small public floats or revenues under $700 million[3] – have more time for 1 and 2 and are, currently, exempted altogether from scope 3.
Scope 3 emissions and climate risk are closely related in that both are dependent on factors a firm cannot directly control. The Port of Vancouver, as we reported