Opinion: Advice to Gensler from the SEC: If you want to get corporate climate disclosures right, this is the way to go
The call by the chairman of the Securities and Exchange Commission, Gary Gensler, to require mandatory disclosure of climate risks suggests that the US is back on the side of the heroes in the climate war. But if the power of the markets is to be used sufficiently to bend the emissions curve, we must be careful not to do things by halves.
Gensler said last week that he asked agency staff to consider whether companies should be required to report their current emissions picture in their annual 10-K filings in a standardized and legally binding manner. This would be a helpful step, but insufficient. It’s a half a deal.
What investors really need to manage their portfolios are honest forward-looking statements from companies about their risks and their plans to reduce their carbon footprint through investments and operating expenses.
Big hurdle for the SEC
There is no specific mandate to disclose the climate today, so it will be a tough job for the SEC to set the framework and for companies to disclose new data that has long been sought by investors, advisors and asset managers.
With no regulatory focus on climate in the past five years, the environmental, social, and corporate governance (ESG) data market has developed rapidly, with competing offerings to assist asset managers and business leaders with valuation and disclosure their risk assessments and how they are used in their decision-making process.
As the founder of a company in the field of climate analysis, we can tell you: The view from the dirty data, gloomy engine room of the financial analysis of climate risk that, yes, it would be absolutely helpful to have current emissions data, reports in a standardized way.
For example, most of the voluntary information on climate risks companies make today is a hodgepodge of net-zero promises or some non-standardized data on how a company could affect atmospheric greenhouse gas emissions. That is certainly useful.
A requirement would be even better that the emission data of areas 1, 2 and 3 are reported properly. (Scope 1 is a company’s direct emissions; Scope 2 data is the indirect use of electricity, for example; and Scope 3 data comes from other sources in the value chain, such as supply chain emissions.)
But even if we have reported the current emissions in detail according to standards and they fit well into the table rows, we will still look back. When it comes to the high risks of climate change, that is totally inadequate. It’s like driving a car up to a cliff and navigating by looking in the rearview mirror.
Far more relevant would be forward-looking statements on how a company views the impact of climate change on its business, adjustments to its operating or capital expenditures to adapt to a changing environment, including plans to invest in upgrading to renewable energy. And then there should be a policy to report on progress in implementing investments and adjustments.
Currently, companies are making net zero commitments for decades into the future that can be as binding as a New Year’s resolution.
When we start looking ahead, things get complicated. The actions companies should take vary widely – an oil company must take very different steps than, say, a retailer. Armies of quanta can analyze correlations and dependencies, but no one except management will really know what these dependencies are and what measures they are ready to take to cope with the impending climate crises.
The SEC’s Gensler will not be able to standardize all financial disclosure. The question he should be considering is what should be the American response to a global discussion of financial markets and regulations related to climate change.
This is where the scenario analysis comes in, as recommended by the Task Force on Climate Related Financial Disclosures (TCFD) of the Financial Stability Board.
In short, the TCFD got it right. His leadership always has a transatlantic character and his recommendations include the integration of a forward-looking disclosure of climate change risks that are reported in the context of the probable climate scenarios.
Contrary to this realistic view of possible climate impacts, companies should be prevented from going their own way. Companies need the leeway to innovate and align their emissions targets with corresponding emissions targets and build resilience in their own very dynamic business environment. Then the market can decide which participants are on the way and which will suffer from the inevitable fossil fuel regulation and price shifts.
It is not dissimilar to the rules for reporting financial results. There are common standards for reporting quarterly sales, profits and losses. We should have similar standards for the same snapshot of Scope 1, 2 and 3 emissions data.
Future plans are more similar to a company’s prospects and risks as set out in its financial records. It should be based on principles and not on standardized regulations.
Providing such a framework of principles is one of the greatest regulatory challenges in history. The fate of the planet hangs in the balance. If Gensler gets it right, America will reappear as a world leader in this crisis and our grandchildren will thank him for it.
Thomas H. Stoner Jr. is the CEO of Entelligent, which provides climate research to help investors determine the effects of climate change. He is the author of “Small Change, Big Gains: Reflections of an Energy Entrepreneur”. David Schimel is a Nobel Climate Prize winner and Chairman of Entelligent.