Originally published by the Union of Concerned Scientists, The Equation.
It’s here! After years of advocacy, one executive order, two proposed laws, and numerous initiatives in federal agencies, the U.S. Securities and Exchange Commission (SEC) – an independent federal agency responsible for protecting the financial system – has finally suggested that publicly traded corporations be true to investors about their climate impacts and how they plan to address them.
As a rule, the SEC announced on March 20, there is a lot to like. The SEC is responsible for protecting investors and ensuring that financial markets operate fairly, safely and efficiently. Because investors have long sought clear, comparable, and consistent ways to measure a company’s vulnerability to climate-related risks, this rule falls directly within the agency’s mandate. For example, a coalition of 700 investors with nearly $ 70 trillion in assets signed a declaration asking corporate boards to disclose climate plans, among other obligations. At the other end of the spectrum, a recent survey of “retail” investors – individuals with investments such as mutual funds or stocks – found that 70 percent support the SEC to demand the detection of corporate climate change risk.
UCS outlined reasons why mandatory and standardized publication of climate data will help communities, encourage climate action, stabilize the financial system and hold fossil fuel companies accountable. The good news is that this rule meets many of the criteria we have set, although there are some areas that could be improved. (This SEC fact sheet summarizes the key elements of the proposed rule.)
Strong and consistent disclosure standards
To begin with, the SEC proposal is in line with existing international frameworks, which is important for addressing global challenges such as climate change. For example, the SEC’s disclosure regime is based on the regime created by the Climate Financial Disclosure Working Group (TCFD), an international initiative that emerged from a council of government financial officials known as the G20. Investors ranging from Google’s parent company Alphabet to Walmart have called on the SEC to use the TCFD framework as a basis as it is already used by hundreds of companies and investors around the world. The rule also bases its emission detection standards on the Greenhouse Gas Protocol (GHG), which classifies emissions into three categories. Since the Greenhouse Gas Protocol is also used around the world, using its definitions will help minimize compliance costs, while allowing investors to assess whether companies are meeting their promises.
UCS also supports a rule provision that requires companies to disclose the role that carbon offsets or renewable energy loans play in their climate-related business strategy. From studying dozens of corporate promises and emission reduction plans, we know that they often rely heavily on these mechanisms. Publishing detailed information on their source, use and impact is vital for investor decision-making and assessing companies’ exposure to climate risk. For example, investors looking for information on whether a company’s business model is truly climate-resistant and low-carbon, will be interested in how much they rely on compensation instead of deep, direct emission reductions.
Global warming emissions are material – Period
Despite these positive elements in the proposal, some additional disclosures are needed to fully understand the company’s risks and opportunities related to climate. For example, the final rule should not allow companies to decide for themselves whether their emissions from band 3, emissions from the products they sell, are “tangible”.
The SEC considers information material if an investor “considers it important when deciding whether to buy or sell securities or how to vote”. Investors need to know how the company’s financial outlook will be affected by the effects of climate change, ranging from infrastructure damage and disruptions in supply chains to changes in consumer preferences. High-carbon companies are most vulnerable to the risks posed by the shift to cleaner energy, known as “transition risk”.
Under the Greenhouse Gas Protocol, emissions from sources owned or operated by a company are classified as Volume 1, emissions from energy purchased by a company to boost its operations are Volume 2, and Training 3 emissions are generated along the rest of the value chain. That value chain extends all the way to consumers who use the company’s products, such as refueling their SUVs. Investors have been looking for data on Scope 3 emissions for years because those emissions often make up a large percentage of high-emission companies.
Take the oil and gas industry. Combustion of fossil fuels for energy accounts for about 75 percent of total U.S. greenhouse gas emissions, and Scope 3 emissions account for 80 to 90 percent of the sector’s total emissions. In two papers published in peer-reviewed journals, UCS researchers and their collaborators found emissions from the 48 largest fossil fuel producers owned by investors. products – including emissions from band 3 – were responsible for approximately 15 percent increase in ocean acidification, about 15 percent increase in global average temperature and about 9 percent increase in sea level between 1965 and 2015. These advances in attribution science, along with evidence of past and ongoing involvement in climate fraud campaigns, provide information on the growing tide of litigation trying to hold fossil fuel companies responsible for climate damage and fraud. For investors who are worried about climate change, it is no more material than that!
Impacts on people and politics are not resolved
The proposed SEC rule also does not deal with political influence. The UCS recommended that the SEC require companies to disclose political activities, including direct and indirect election costs and lobbying. Investors have been pressuring companies to disclose such activities for more than a decade, arguing that lobbying can degrade a company’s reputation if it runs counter to the company’s stated priorities, which in turn reduces shareholder value. Companies like ExxonMobil have a history of financing third-party groups that serve as a front line in undermining science-based decisions. The companies responded by providing reports on their lobbying activities and membership in trade associations, but I found key shortcomings in these voluntary revelations.
We were also disappointed to see that the rule does not require companies to include information on how they deal with environmental justice. In its latest report, the UN Intergovernmental Panel on Climate Change (IPCC) stated that “risks related to national and international inequality – which act as an obstacle (low-carbon transition) – have not yet been reflected in financial community decisions. . Stronger governance by regulators and policy makers has the potential to close this gap. ”
Climate change and its economic consequences affect people unfairly, and this represents a material financial risk for companies and investors. For example, a recent analysis by UCS found that extreme heat could cause tens of millions of U.S. outdoor workers together to lose $ 55.4 billion in earnings each year by the middle of the century. Companies that depend on these workers could face not only a shortage of manpower, but also increased responsibility for precarious working conditions.
Investors deserve security and stability
Opposition to the proposed rule is already forming among companies that claim that emissions from Scope 3 are too difficult to measure. For example, business trade associations such as the U.S. Chamber of Commerce often contradict their members, complaining that adhering to new announcements would be too burdensome, and lawmakers say such rules should be left to Congress rather than the executive.
But because investors so clearly want the data to be disclosed – and don’t get it – the SEC’s move to establish and implement new rules is necessary. The United States is already behind the curve on this issue, as disclosure rules are already in place in several countries where US companies trade, including Canada and the United Kingdom. The current situation is not acceptable for millions of investors who risk losing big money if companies are not open about the effects of climate change on their business and vice versa. “Clear signaling from governments and the international community… reduces uncertainty and transition risks for the private sector,” the IPCC report said. Between pandemics, wars and political upheavals, we have all had enough risks and uncertainties in recent years. Investors – and the public – deserve stability and security. A strong climate rule could help make that happen.
Let your voice be heard!
You can encourage the SEC to hold corporations accountable for detecting and addressing climate risk by submitting a comment by June 17 on the rule “Improving and standardizing climate disclosure for investors. Submit your comment by visiting our action alert page here.
For more information to help you design your comments, see UCS’s comments at the SEC’s 2021 request for a public contribution to the potential rule, as well as the Investor’s Statement of Basic Principles for the SEC’s publication of climate change rules. UCS has also supported climate risk detection initiatives in the Commodity Futures Trading Commission and the Federal Housing Finance Agency. Finally, UCS supported the 2021 Climate Risk Detection Act and testified before Congress about the risks that climate change poses to the U.S. financial sector.
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