It’s here! After years of advocacy, one executive order, two proposed laws, and numerous initiatives across federal agencies, the US Securities and Exchange Commission (SEC)—the independent federal agency responsible for protecting the financial system—has finally proposed that publicly traded corporations be truthful with investors about their climate impacts and how they plan to address them.
There’s a lot to like in the rule the SEC announced on March 20. The SEC is charged with protecting investors and ensuring that financial markets run fairly, safely and efficiently. Since investors have long asked for clear, comparable and consistent ways to measure a company’s vulnerability to climate-related risk, this rule falls squarely 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 commitments. At the other end of the spectrum, a recent poll of “retail” investors—individuals with investments such as mutual funds or stocks—found that 70 percent support the SEC requiring corporate climate-risk disclosure.
UCS has laid out the reasons why mandatory and standardized climate disclosure will help communities, spur climate action, stabilize the financial system, and hold fossil fuel companies accountable. The good news is that this rule meets a lot of the criteria we set, although there are some areas that could be improved. (This SEC fact sheet summarizes key elements of the proposed rule.)
Strong and Consistent Disclosure Standards
To begin with, the SEC proposal is consistent with existing international frameworks, which is important for addressing a global challenge such as climate change. For example, the SEC rule’s disclosure regime is based on one created by the Task Force on Climate-Related Financial Disclosures (TCFD), an international initiative that grew out of a council of government finance officials known as the G20. Investors ranging from Google’s parent company Alphabet to Walmart have called for the SEC to use the TCFD’s framework as a baseline since it’s already used by hundreds of companies and investors globally. The rule also bases its emissions disclosure standards on the Greenhouse Gas (GHG) Protocol, which classifies emissions in three categories. Since the GHG Protocol is also used around the world, using its definitions will help minimize compliance costs while enabling investors to evaluate whether companies are living up to their promises.
UCS also supports a provision in the rule requiring companies to disclose the role that carbon offsets or renewable energy credits play in their climate-related business strategy. We know from scrutinizing dozens of corporate emissions-reduction pledges and plans that they often rely heavily on these mechanisms. Disclosure of detailed information about their source, use, and impact is vital to investors’ decision-making and evaluation of companies’ exposure to climate risks. For example, investors seeking information about whether a company’s business model is truly oriented toward a climate-resilient, low-carbon world will be interested in how much they rely on offsets instead of making deep, direct emission cuts.
Global Warming Emissions Are Material—Period
Despite these positive elements in the proposal, some additional disclosures necessary to fully understand a company’s climate-related risks and opportunities are missing. For example, the final rule should not allow companies to decide for themselves whether their Scope 3 emissions, the emissions from the products they sell, are “material.”
The SEC considers information material if an investor “would consider it important when determining whether to buy or sell securities or how to vote.” Investors need to know how a company’s financial outlook would be affected by impacts resulting from climate change, which range from damage to infrastructure and disruptions in supply chains to changes in consumer preferences. High carbon-emitting companies are the most vulnerable to the risks resulting from the shift to cleaner energy, known as “transition risk.”
According to the GHG Protocol, emissions produced from sources owned or operated by a company are classified as Scope 1, emissions from energy a company buys to fuel its operations are Scope 2, and Scope 3 emissions are generated along the remainder of the “value chain.” That value chain extends all the way to the consumers using the company’s products, such as filling up their SUVs with gasoline. Investors have asked for data on Scope 3 emissions for years because those emissions often account for a large percentage of high-emitting companies.
Take the oil and gas industry. Burning fossil fuels for energy accounts for about 75 percent of total US 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 48 of the largest investor-owned fossil fuel producers’ products—including Scope 3 emissions—were responsible for approximately 15 percent of the increase in ocean acidification, around 15 percent of the global average temperature increase, and about 9 percent of sea level rise between 1965 and 2015. These advances in attribution science, along with evidence of past and ongoing involvement in climate deception campaigns, are informing a rising tide of litigation seeking to hold fossil fuel companies accountable for climate damages and fraud. For investors concerned about climate change, it doesn’t get more material than that!
Impacts on People and Politics Not Addressed
The proposed SEC rule also fails to address political influence. UCS recommended that the SEC require companies to disclose political activity, including direct and indirect election spending and lobbying. Investors have pressed companies to disclose such activities for more than a decade, arguing that lobbying can degrade a company’s reputation if it conflicts with the company’s stated priorities, which in turn reduces shareholder value. Companies such as ExxonMobil have a history of funding third-party groups that serve as the front line in undermining science-based decisionmaking. Companies have responded by providing reports on their lobbying activities and trade association memberships, but I found key gaps in these voluntary disclosures.
We were also disappointed to see that the rule does not require companies to include information about how they are addressing environmental justice. The UN Intergovernmental Panel on Climate Change (IPCC) stated in its most recent report that “risks relating to national and international inequity—which act as a barrier to the (low-carbon transition)—are not yet reflected in decisions by the financial community. Stronger steering by regulators and policymakers has the potential to close this gap.”
Climate change and its economic consequences affect people inequitably, and that presents a material financial risk to companies and investors. For example, a recent UCS analysis found that extreme heat could result in tens of millions of US outdoor workers collectively losing $55.4 billion in earnings each year by midcentury. Companies that are dependent on those workers could face not only a labor shortage, but also increased liability for unsafe worker conditions.
Investors Deserve Certainty and Stability
Opposition to the proposed rule is already taking shape among companies that claim Scope 3 emissions are too hard to measure. For example, business trade associations such as the US Chamber of Commerce often contradict their own members by complaining that complying with new disclosures would be too burdensome, and lawmakers say such rules should be left to Congress, not the executive branch.
But because investors so clearly want disclosure—and aren’t getting it—the SEC’s move to establish and enforce new rules is necessary. The United States is already behind the curve on this issue, given 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 to the millions of investors who risk losing big money if companies aren’t open about the impacts of climate change on their business and vice versa. “Clear signaling by governments and the international community … reduces uncertainty and transition risks for the private sector,” the IPCC report states. Between pandemics, wars and political upheaval, we’ve all had enough risk and uncertainty in recent years. Investors—and the public—deserve stability and certainty. A strong climate disclosure rule could help make that happen.
Make Your Voice Heard!
You can urge the SEC to hold corporations accountable for disclosing and addressing climate risks by submitting a comment on the rule, “The Enhancement and Standardization of Climate-Related Disclosures for Investors,” by June 17. Submit your comment by visiting our action alert page here.
For more information to help you craft your comments, see UCS’s comments to the SEC’s 2021 request for public input on a potential rule as well as the Investors’ Statement of Essential Principles for SEC Climate Change Disclosure Rulemaking. UCS also has backed climate risk disclosure initiatives at the Commodity Futures Trading Commission and the Federal Housing Finance Agency. Finally, UCS endorsed the Climate Risk Disclosure Act of 2021 and testified before Congress on the risks climate change posed to the US financial sector.
Originally posted by Union of Concerned Scientists on 2022-06-02 11:56:37