3 Ways Climate Change Disclosures Would Benefit Investors

The Securities and Exchange Commission in March released guidance for publicly traded companies on the links between their businesses and climate change – a boon for investors, regardless of whether they’re concerned with environmental, social and governance (ESG) criteria.

Proposed SEC rules would require a number of new disclosures. For instance, companies would have to reveal any financial risks related to climate change. They also would be compelled to include details about corporate greenhouse gas emissions, which are a globally recognized way of measuring a company’s contribution to climate change. The SEC also wants a discussion of how companies are managing climate risk.

Investors focused on ESG investing have long called for standardized climate change disclosures, especially in light of the fact that public companies are responsible for 40% of greenhouse gas emissions.

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“For too long, disclosure of climate risk information by publicly traded companies has been voluntary and without uniform standards, said New York City Comptroller Brad Lander. “As a result, investors lack the information needed to evaluate the financial risks to their portfolios posed by physical climate impacts like rising seas, floods and wildfires, as well as from policies enacted to reduce emissions and exposure to climate threats.”

Many companies already report their greenhouse gas emissions, and welcome standardization efforts. But plenty of companies, business groups, and even states are likely to litigate the proposed rules.

Expect an animated 60-day comment period.

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For now, however, we’ve considered three ways these climate change disclosure rules could benefit investors.

“Greenwashing” Will Be More Difficult

Greenwashing is presenting an exaggerated public image of environmental responsibility, and the SEC’s proposed rules would clamp down on this practice.

If passed, publicly traded companies would have to report annual “scope 1 and 2” emissions. These are emissions that companies are directly responsible for, such as pollution from an auto factory (Scope 1) and emissions from the energy required to power the factory (Scope 2).

In certain cases, the SEC will also require reporting of “Scope 3” emissions, or those emanating along the supply chain and from product use, such as emissions from mining the materials used to make the car, and then from driving it.

The proposed SEC climate change disclosure rules include a phase-in period, with particular flexibility on reporting Scope 3 emissions and greater latitude for smaller companies. Regardless, investors would be able to compare the emissions of different companies far more easily.

Cleaner Supply Chains

Many publicly traded companies already measure and report on Scope 1 and 2 emissions. Scope 3 is trickier, especially when companies rely on the private sector.

However, as those disclosures increase for public companies, private suppliers will have more incentive to track and manage their emissions in order to compete for contracts. Better climate management among suppliers will in turn make for a more resilient supply chain.

Carbon Offsets Will Be More Transparent

More than 5,000 companies have pledged to achieve net zero emissions by 2050. One way they intend to achieve this goal is through the purchase of carbon offsets, or projects that either capture carbon or ensure that natural carbon absorbers, such as forests, remain standing.

Carbon offsets have frustrated environmentalists and investors for their lack of standardization and clarity. The SEC's proposed climate change disclosure rules would require companies to reveal “transition plans” to a lower-carbon economy, which are widely understood to include more detail about offsets.