Whether or not investors care about environmental, social, or governance (ESG) factors, they can all benefit from the advice provided by the Securities and Exchange Commission (SEC) for publicly-traded companies on the interconnections between their operations and climate change.
Several disclosures are needed to comply with the proposed SEC requirements. Businesses would have to disclose climate change-related financial risks and emissions of greenhouse gasses. The SEC requests disclosure of how businesses are coping with climate risk.
Given that public firms are accountable for 40% of carbon dioxide emissions, investors with an emphasis on ESG investment have long asked for uniform climate change disclosures.
Company disclosure of climate-related risks has been inconsistent and optional for far too long. Therefore, investors do not have the data necessary to assess the risks to their investments from physical and climatic changes such as floods, rising seas, and wildfires or from policies implemented to lessen emission levels and exposure to these dangers.
Many businesses are disclosing their GHG output and supporting ongoing efforts to standardize this reporting. The proposed restrictions will be challenged in court by various organizations, including businesses and even states.
For the time being, nonetheless, we have identified three ways these global climate disclosure laws may help investors.
Greenwashing will be harder.
The SEC's new standards would stop "greenwashing," the practice of creating a false impression of environmental responsibility.
The bill would require publicly traded firms to declare their annual "scope 1 and 2" pollution if it were to become law. Specifically, this category includes pollution caused by a company itself, such as an automobile assembly plant (Scope 1), as well as pollution caused by the generation of the electricity needed to run the plant (Scope 2).
In some contexts, the SEC will demand reporting of "Scope 3" pollutants. These are emissions that come from both the supply chain and the use of the product.
There is a phase-in window in the climate change disclosure standards, and smaller corporations and those reporting Scope 3 pollution have more leeway. Whatever the case, investors would have a much easier time comparing the footprints of various companies.
Greener Supply Chains
Many publicly traded firms already track and report scope 1 and 2 emissions. The third scope is the most difficult because of the increased reliance on the private market often seen in modern businesses.
However, if these disclosures become more commonplace for publicly traded corporations, private vendors will have more need to monitor and control their pollution to win business. If suppliers handle climate change better, the supply chain will be more robust.
Increased Discretion in Carbon Offsets
Over 5,000 businesses have committed to eliminating all emissions by the year 2050. They want to accomplish this partly by financing "carbon offset" projects, which either directly trap carbon or guarantee the survival of carbon absorbers like forests.
There is no transparency or consistency in carbon offsets. This has angered conservationists and investors. Companies must disclose their plans to achieve a lower-carbon economy under regulations commonly expected to contain additional information regarding offsets.