ESG

3 Ways Climate Change Disclosures Would Benefit Investors

Publicly traded companies might soon have to report how they manage climate risk – and their own greenhouse gas emissions.

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.

“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.

Sign up for Kiplinger's FREE Closing Bell e-letter: Our daily look at the stock market's most important headlines, and what moves investors should make.

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.

Most Popular

5 Ways to Prepare for a Recession
recession

5 Ways to Prepare for a Recession

The signs seem to be pointing in one direction these days, so if you’re worried about being ready for a recession, consider taking these five measures…
June 28, 2022
Your Guide to Roth Conversions
Special Report
Tax Breaks

Your Guide to Roth Conversions

A Kiplinger Special Report
February 25, 2021
In What Order Should You Tap Your Retirement Funds?
retirement planning

In What Order Should You Tap Your Retirement Funds?

Should you go with your IRA first or your brokerage account? Pulling money haphazardly can have negative implications. Instead follow this road map fo…
June 28, 2022

Recommended

Hydrogen Stocks: Unstable, But Potentially Explosive, Too
ESG

Hydrogen Stocks: Unstable, But Potentially Explosive, Too

Green hydrogen is in its relative infancy, making related stocks quite volatile. But long-term investors can use that to their advantage.
June 30, 2022
New ESG Fund from Engine No. 1 Leans on Activism
ESG

New ESG Fund from Engine No. 1 Leans on Activism

The Engine No. 1 Transform Climate ETF (NETZ) offers an approach to sustainable investing that includes – wait for it – oil and gas companies.
June 14, 2022
McDonald's (MCD) Stock: Tasty, Empty Calories
Investing for Income

McDonald's (MCD) Stock: Tasty, Empty Calories

For some, ESG challenges such as climate change and animal welfare offset the durability and dividends of MCD shares.
May 25, 2022
Buy the Dip in EV Stocks? Here Are 7 to Consider
investing

Buy the Dip in EV Stocks? Here Are 7 to Consider

If you're looking to gain exposure to electric vehicle stocks while they're still down, here are some names worth watching.
April 29, 2022