Climate Disclosure vs. Climate Work
Why the SEC’s rules are just a really low floor, and what you should do next.
There has been a significant amount of (virtual) ink spilled over the SEC’s new climate disclosure rules. There has also been a significant amount of inaccurate information disseminated through LinkedIn and other channels. You can read the SEC’s Fact Sheet (here) and full text of final rule (nerds only, here). Additionally, below are a few of the resources we turn to:
Photo by Bernard Hermant on Unsplash This is supposed to be an un-ironic image of a “floor.”
We are not going to restate or repackage these helpful summaries written by respected industry experts. We are going to talk about the bigger picture and tie this context back to key risk management themes; because as advisors and strategists, that’s where we can add the most value.
SEC rules are imperfect, yes; they are also a step in the right direction.
Other key signals and take-aways
Let’s talk about Scope 3
While, to some degree, we wish Scope 3 was included in the SEC’s disclosure requirements, we balance that against the effort, time and resources required to track and disclose Scope 3.* We hope that companies put the resources that would have been dedicated to tracking and reporting into training their supply chain and instituting good Governance policies that support better climate performance through their supply chains.
We also know that hope is not what meaningful climate action is built on.
That said, the exclusion of Scope 3 from the SEC’s rules does not mean that companies will not have to track and report on Scope 3 for other reasons. State-level legislation will require many companies to disclose their Scope 3 emissions. One good example is California’s SB 253, or the Corporate Climate Data Accountability Act (learn more here), which generally requires all entities (public and private) with over $1B in revenue, “doing business” in California to report scopes 1, 2 and 3. After California took action, other states, including Washington state (learn more here), attempted to introduce similar legislation and subsequently adopted a “wait and see” approach.
The bottom line: should you be working towards understanding and reducing your Scope 3 impacts? Yes. Can that be challenging? Yes, but it will get easier as new technology is introduced, the cost comes down, and disclosure becomes “market standard.” Should you let the SB 253 lawsuit stop you from doing this work? No. There will always been lawyers and organizations willing to file lawsuits, carry on.
Climate and carbon-driven claims will come under increased scrutiny
The SEC rules provide for some level of third-party assurance, as does SB 253. This is important because the data on climate impacts can be challenging and companies can make inadvertent - and sometimes intentional - claims that are not true or are misleading.
That said, false, misleading and inaccurate climate claims are becoming increasingly expensive. California’s latest legislation, AB 1305, or the Voluntary Carbon Market Disclosures Act, is a good example. (learn more here). Despite the somewhat confusing name, AB 1305 essentially requires that companies making certain claims - including but not limited to “net zero” and “carbon neutral” and when using carbon offsets to support those claims - must disclose specific information related to how those claims were made and substantiated; and if they involve offsets, information on the offset project(s).
One way to think about legislation like AB 1305 is that there are relatively high penalties (up to $2,500 per day, for each day information is unavailable or inaccurate on a company’s website, up to $500,000). Comparatively speaking, the heft of those penalties outweighs the lift to ensure these claims are supported and the proper information is disclosed.
Tune out the “backlash” and see the ESG bigger picture
All companies need to do better on Environmental, Social and Governance factors in order to survive.
The SEC set a relatively low floor for companies that are subject to these new rules. State-level legislation and international rules that indirectly (and sometimes directly) impact US companies will likely continue to set more stringent requirements. Additionally, the market, and increasingly “green” savvy consumers, will continue to demand both increased transparency and substantive improvement, from all companies.
The bottom line: all companies should be taking E, S and G seriously and working to get a handle on their Scopes 1 and 2, with a plan to work on Scope 3. If you need support, email us!
*If Scopes 1, 2 and 3 are new to you, review this visual resource from climate leader Stacy Smedley
DISCLAIMER: This is common sense, but bears repeating: this blog is intended for informational purposes and does not contain or convey legal advice. The law is inherently fact specific. General information, including this blog, should not be used as a substitute for competent legal advice from a lawyer you have retained and who has agreed to represent you. Climate Aligned Law is licensed in Washington state and does not practice Securities law or give specific securities advice or counsel.