Climate change is impacting the way everyone lives and does business. For individuals, personal accountability and passion is what keeps us moving ahead in the face of uncertainty. But businesses are often not held accountable for their climate-affecting actions. A new set of rules may require publicly-traded companies to disclose the climate change related risks associated with their businesses.
In March, the Securities and Exchange Commission (SEC) released a statement outlining proposed rules that would require publicly-held companies to provide climate risk data and greenhouse gas emissions to regulators and investors. Companies would also be responsible for reporting annually on progress toward their targets. The rules come at a time when many of us wonder how much of a company’s sustainability report is greenwashing and how much is climate action. And why does the SEC have oversight over this and not the Environmental Protection Agency?
Let’s break down what the announcement means and how it might impact our race to mitigate climate change.
WHAT IS CLIMATE RISK?
Climate change risk assessment involves the formal analysis of the consequences, likelihoods, and responses to the impacts of climate change and the options for addressing them within society.
Most human actions hold potential climate risks – driving to work every day, throwing plastic into landfills, purchasing natural gas, etc. To date, many companies, individuals, and entities have not been held accountable for the future financial risks of their behaviors. As our climate continues to change, it is likely that areas of the earth may become uninhabitable, creating significant economic and social consequences.
WHO IS THE SEC AND WHY DO THEY CARE ABOUT THE ENVIRONMENT?
The Securities and Exchange Commission (SEC) is a federal government agency responsible for regulating the securities markets and protecting investors. The SEC was first established in 1933 mainly in response to the stock market crash of 1929 that led to the Great Depression.
Through their authority, publicly held companies are required to report detailed data outlining their financial performance and any risks involved in their business. The data helps investors decide which risks to take and which to avoid.
Unlike the Environmental Protection Agency (EPA), the SEC does not have a tradition of monitoring the impacts of climate change, but business as usual may look pretty grim if we don't change our behaviors. The NOAA Office for Coastal Management predicts that by 2050, up to $106 billion worth of coastal property will likely be below sea level, and NASA reported that maize crop yields could decline by 24 percent and wheat by 17 percent by 2030 if we do not make significant changes.
With the newly proposed rules, investors who represent tens of trillions of dollars would now have the information necessary for managing which risks to take on — and the public would have better insight into the impacts of many common brands.
In 2010, the SEC released Interpretive Guidance for disclosing climate risks associated with business or legal developments. As can be expected with voluntary direction, not all companies took this as an opportunity to start reporting climate risks and those who did used discretion in the information they chose to share. A report conducted by the sustainability nonprofit, Ceres, found an increase in the number of companies reporting on climate-related risks following the release of the guidance, but they found the information released lacked depth and did not quantify the impacts or risks. Over the past decade, many companies have released targets to achieve carbon neutrality. Apple began reporting on its carbon footprint in 2008 and its future climate targets. However, the new rules would standardize the information reported and require annual updates on targets, tracking successes and failures for companies like Apple.
WHAT EXACTLY WILL COMPANIES BE REPORTING?
Upon registering with the SEC, a publicly held company would need to disclose how they manage climate-related risks in their business plan – and going forward they would be required to report annually on progress.
In addition to the financial risk assessments, companies would be required to report on annual greenhouse gas emissions that occur directly or indirectly as a result of their owned facilities or activities. Some companies would also be required to disclose emissions associated with upstream and downstream activities within their value chain – such as those caused when a consumer uses a product. For a car manufacturer this could mean reporting on vehicle emissions after a car has left the showroom.
FUTURE IMPACT ON CLIMATE CHANGE
In theory, the rules will give us a better picture of how publicly held companies are impacting our environment and how this may change for better or worse over time. Investors will have insight into the financial risks they are taking on and the ability to track progress over time toward global targets.
For consumers this moment can be read as hopeful. The government is recognizing that environmental risks will lead to financial instabilities that must be addressed. Since its release, the public has 60 days to comment on the proposal. For more details on what the rules will mean, visit the SEC press release.