Managing risks
SEC rule may reveal what corporate America is really doing on climate change.
Three years ago, climate change bankrupted California’s largest utility.
The state’s firefighting agency found that Pacific Gas & Electric was responsible for more than 1,500 fires across the state from 2014 through 2017. The utility’s aging power lines and equipment, combined with an unprecedented decade-long drought, had turned the state into a tinderbox. Facing an estimated $30 billion in liabilities and 750 lawsuits, the company filed for Chapter 11 bankruptcy protection in June 2019.
PG&E’s fate was hardly unexpected. For decades, investors had been sounding the alarm about the potential for a climate-driven economic crisis. Extreme weather events have the potential to disrupt businesses, destroy assets and force mass migration.
Our own state knows this only too well. Texas is battered annually by increasingly powerful hurricanes that cause billions of dollars in damages. Just last week, 178 wildfires torched more than 108,000 acres across the state. By 2060, scientists predict that sea levels in Galveston will rise up to 25 inches, causing losses for homeowners, diminished property values and enormous risks in mortgage portfolios.
With the threat of these disasters now an everyday reality, investors and asset managers have been clamoring for more information on how companies across the globe are assessing and managing these risks, and how much their own emissions are contributing to them. BlackRock, the world’s largest asset management company, and other financial firms, have urged the U.S. Securities and Exchange Commission to build a climate disclosure framework that would help investors better integrate climate risks and opportunities into their portfolios.
After months of deliberation, the SEC answered the call on Monday, announcing new requirements for publicly traded companies to report information on greenhouse gas emissions and risks related to climate change. The SEC will solicit public comments for at least two months before it shapes the final rule.
Starting next fiscal year, companies would have to disclose their own direct emissions, as well as emissions from purchased electricity and other forms of energy. But they would also have to disclose “downstream” greenhouse gases generated by suppliers and partners if they are included in any emissions targets the company has set. If a company has publicly set climate-related targets — an estimated 622 publicly-traded companies have made Net Zero pledges to completely offset their emissions — it would be required to detail the scope of activities and emissions to meet those targets, define the timeline for doing so, and provide information about its carbon offsets.
Some commentators and oil and gas trade organizations immediately slammed the proposed rule. But requiring companies to disclose the climate-related impacts of their operations is neither an overreach nor a usurpation of congressional authority. “Climate risk is investment risk,” BlackRock said in comments filed with the SEC. “It is our conviction that integrating assessment of climate-related considerations into our investment processes will result in better long-term riskadjusted returns for our clients.”
The SEC has crafted a rule that fits squarely within its mandate: to ensure that investors get the information they need, that capital markets can function efficiently and the public interest is protected. The proposal brings the United States in line with its international peers such as the European Union, Hong Kong and Australia, which have already set standardized regulations on climate reporting. Big companies, which would shoulder the heaviest reporting obligations, will have until 2024 to provide a basic suite of information on direct and indirect emissions, and until 2025 to report downstream emissions.
The new rule would codify what many publicly traded companies — including energy giants such as Exxon Mobil, Chevron, and BP — have already been doing. The SEC has urged companies since the 1970s to disclose material information about environmental factors that could affect profits. As climate concerns have grown more urgent, more companies have done so, but in a patchwork way that has been difficult to track. In 2020, 92 percent of the S&P 500 companies published a sustainability report.
“We've got a lot of information in the marketplace right now,” says Isabel Munilla, a director at Ceres, a nonprofit that advises investors on climate change. “The problem is, it's not comparable, it's not consistent, and some of it is pretty low quality.”
There’s another advantage to the rule: It will require companies to show how they are honoring their often fuzzy Net Zero pledges. A recent report published by the New Climate Institute and Carbon Market Watch, found that 25 of the world’s most valuable companies are misleading the public with their emissions accounting.
The proposal is no substitute for congressional action on climate change. Mandating disclosure doesn’t equate to mandating a smaller carbon footprint. The world is still racing toward potential climate disaster if it can’t slow the planet’s warming.
But you can’t fix what you can’t measure. Climate disclosures are an essential first step in quantifying the monumental task ahead of us. Having a clear inventory of emissions from large corporations will make the path to a cleaner economy that much clearer.