Pollution police? Disclosure detectives? Climate cops? Those nicknames are probably too lighthearted, but do celebrate a very important new US government rule that could springboard the Securities and Exchange Commission (SEC) into the top slot for US climate-related disclosures. You see, it has been revealed that, as of Monday, the SEC is stepping up to require all publicly traded companies to disclose their greenhouse gas (GHG) emissions and the climate risks they face. This announcement is expected to shake up hundreds of businesses, as the need to report GHG emissions in a standardized way represents an overhaul of corporate disclosure rules such as the US hasn’t seen in more than a decade.
As 2022 finishes its first quarter, the Biden-Harris administration has made a habit of using of a “whole-of-government” response to the climate crisis. The newest action in the administration’s environmental toolkit requires publicly traded businesses to report GHG emissions and emerges as more stockholders than ever seek transparency about climate change risks.
That push from investors has been translated into a mechanism to force businesses to prepare for climate emergencies and environmental regulations, aspects of business planning that have often gone untapped.
With the requirement to report GHG emissions, many corporations could be caught short. Amazon, Google, Ikea, and BMW are among some of the world’s biggest companies failing to meet their own proclaimed climate targets and align with international agreements. Moreover, while many firms already voluntarily share some details about their environmental impact, there are sometimes wide discrepancies in how companies calculate carbon emissions, said Danielle Fugere, president and chief counsel of shareholder advocacy group As You Sow.
“These disclosure rules are critical to ensuring that Wall Street cannot continue to get away with making investments that exacerbate the climate crisis,” Senator Elizabeth Warren (D-MA) told the Washington Post. “The American people and financial investors have a right to know the risks of these investments, and it’s taken far too long for the SEC to take action.”
It’s about time that the private sector will have to confront their part in an increasingly warming world.
Business & the Climate Crisis: The Time to Report GHG Emissions is Long Overdue
A January, 2022 report from McKinsey captures the need for businesses to report GHG emissions. “The net-zero equation remains unsolved: GHG emissions continue unabated and are not counterbalanced by removals, nor is the world prepared to complete the net-zero transition.” Governments and businesses will need to act together with “singular unity, resolve, and ingenuity” in a confluence of planning, envisioning investment horizons, and taking immediate actions to manage risks and capture opportunities.
Businesses will need to define, execute, and evolve decarbonization and offsetting plans. To do so, McKinsey outlines, businesses will have to:
- adjust their business models as conditions change and opportunities arise
- integrate climate-related factors into decision-making processes for strategy, finance, and capital planning, among others
- consider leading action with others in their industry or ecosystem of investors, supply chains, customers, and regulators
Fortune paints a less rosy collegial picture of the necessary business transition to a zero-emission economy. Complexities will be an inherent part of the energy transition, they say, with required massive reallocation of capital.
Right now, about two-thirds of business spending overall goes towards high-emissions assets like fossil-based power and internal combustion engine vehicles; roughly the same proportion has to go towards low-emission ones on average through 2050. The current front-loaded nature of these investments, with the biggest increase required between 2026 and 2030, will affect “how unevenly the burdens of the transition would be felt.”
As CleanTechnica readers are already aware, sectors with high-emissions products or operations, such as fossil fuels and automotive, will be disproportionately exposed by the new SEC rule, as will those with high-emissions supply chains, such as construction.
Pamela Chase, political science professor at Manhattan College, told (business-friendly) Forbes, “In 2022, there will be considerable pressure on both governments and the private sector to continue efforts to decarbonize operations, while making the necessary efforts to adapt their operations to an ever-warming planet. Governments cannot combat climate change and limit global warming to 1.5°C without the private sector playing its part. There will definitely be increased pressure on business and corporations in 2022.”
Mechanisms to Report GHG Emissions
GHG emissions are the result of gases that trap heat in the atmosphere. The largest source of GHG emissions from human activities in the US is from burning fossil fuels for electricity, heat, and transportation. The way business is done has a direct correlation to the amount to GHG emissions that affect the planet.
As governments around the world adopt policies aimed at reducing carbon emissions and boosting renewable energy, businesses with significant investments in fossil fuels could wind up with stranded assets. Many countries other than the US already have plans to jump start mandated emissions reporting. Britain and Japan plan to require certain large businesses to disclose their emissions starting in April, while the European Union is set to force all large companies listed on the European stock exchange to report their emissions beginning in 2024.
The GHG Protocol Corporate Accounting and Reporting Standard provides requirements and guidance for companies and other organizations preparing a corporate-level GHG emissions inventory. The standard covers the accounting and reporting of seven greenhouse gases covered by the Kyoto Protocol – carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), hydrofluorocarbons (HFCs), perfluorocarbons (PCFs), sulphur hexafluoride (SF6), and nitrogen trifluoride (NF3).
The Corporate Climate Responsibility Monitor report, published by NewClimate Institute and Carbon Market Watch, looks into how companies tracked and took an honest step to report GHG emissions, whether they set actual emissions reduction targets (as opposed to just using terms like “net zero”), what measures they were already taking and whether any plans to offset emissions had been publicized.
Consumers in general want fossil fuel accountability. The Biden administration has increasingly urged the private sector to grapple with the risks of rising temperatures. The administration released a report in the fall warning that climate change poses an emerging threat to the stability of the US financial system and urged bank regulators to take steps to mitigate that threat.
On March 3, 2022, EPA Administrator Regan signed a proposed rule that would set new, more stringent standards to reduce pollution from heavy-duty vehicles and engines starting in model year (MY) 2027. The proposed standards would significantly reduce emissions of smog- and soot-forming nitrogen oxides (NOx) from heavy-duty gasoline and diesel engines and set more stringent GHG standards for certain commercial vehicle categories.
Business groups have opposed the federal government mandating any environmental disclosures. The US Chamber of Commerce, the nation’s largest business lobbying group, has argued that, because environmental data is “inherently uncertain,” businesses should not be forced to include it in their annual updates to investors — for which they can be held legally liable. “If that information goes into an SEC filing, that’s where companies can get sued,” said Tom Quaadman, executive vice president of the chamber’s Center for Capital Markets Competitiveness.
The SEC’s proposed rule for publicly traded companies to report GHG emissions will go through a public comment period before a final rule is voted on by the agency’s 4 commissioners — 3 Democrats and one Republican. The regulation is likely to face legal challenges on the basis of whether the commission has the authority to tackle climate issues, said Kathleen Sgamma, head of the oil and gas industry group Western Energy Alliance.