The seal of the US Securities and Exchange Commission hangs on the wall at the SEC headquarters in Washington.
Jonathan Ernst | Reuters
The Securities and Exchange Commission on Monday issued a Proposal for new rules that would require companies to disclose their risks related to climate change and greenhouse gas emissions. It will take some time until the proposal becomes law, but if it does, the implications will be huge.
Standardizing climate disclosure will create its own industry of experts and technology solutions to monitor, confirm, and report those risks. Companies that voluntarily track and disclose their emissions data can gain an advantage over others.
The SEC’s climate rule will also provide more transparency for investors, customers and other stakeholders to build the data-driven case for cleaner alternatives. The climate laggards could then lose money as customers and investors move their money to greener options.
Winner: Companies that control carbon emissions
Companies that use clean energy and have a relatively low carbon footprint will benefit from the SEC’s climate rule, while carbon-intensive companies will “fail over time.” Claire Healydirector of the Washington, DC, office of the independent climate change think tank E3Gtold CNBC.
Clear emissions data gives shareholders, customers and other stakeholders a strong wall against companies that are irresponsible with their emissions and other climate impacts, Reena Aggarwala professor of finance at Georgetown.
Aggarwal told CNBC there’s a historical precedent for clear information allowing investors to divest from companies that don’t meet certain ethical standards.
For example, student protests have helped push universities to divest from fossil fuel investments. In addition, sovereign wealth funds and pension funds, such as CalPERS in Californiadivest from tobacco stocks.
“Even though they may be profitable in the short term, in the long run they are reducing risk by doing so,” Aggarwal said.
But that doesn’t mean that SEC climate data should be the sole piece of a company’s sustainability story.
“The rule proposed by the SEC is another shakeup on the arrow designed to change investors’ calculus and lead to faster decarbonisation,” Healy told CNBC. “It clearly combines with other factors that influence the final investment decision including tightening government policy, explicit/hidden carbon pricing, risk of asset entanglement, shareholder pressure, social license to operate, employee retention.”
Losers: Businesses have a surprisingly bad carbon footprint
Companies with surprisingly high carbon emissions could be at a real disadvantage when the new regulations come into effect.
“I think these companies will suffer in two ways,” Aggarwal said. “The cost of capital will go up and their revenue will go down. So both the product markets and the financial markets impact these companies.”
She added, “I think that trend has already started. But now, as transparency becomes clearer, it will be easier for both consumers and investors to see exactly what is happening. .”
However, the rules will not be the death knell for companies with heavy emissions but have disclosed their impact. It’s also not a big deal for companies that simply don’t have a viable alternative yet.
For example, manufacturing, industrial chemicals, cement, pulp and paper are energy-intensive industries and most investors know this, said Brandon Owens, corporate vice president of sustainability. business consulting firm said. Group Sourcing Details.
“I don’t think there would be an expectation that suddenly they could decarbonise,” Owens told CNBC. “We want transparency. Decisions can be made around that. We want to know that there’s a plan in place to start addressing carbon emissions.”
Winner: Software and Compliance Professionals
Companies will need help figuring out how to monitor and report their climate risks. According to Rich SorkinCEO and Co-Founder of Jupitera climate risk analysis firm.
Companies that can automate carbon accounting and reporting processes will also do well.
“You’ll have Salesforce-style success,” says in the field Kentaro KawamoriCEO of Persefonia software platform that helps companies analyze, manage and report their carbon footprint.
“Just like Salesforce created a customer record-keeping system, companies like us – you’ll have a big winner or two – will create a record system for the carbon accounting part,” Kawamori said. speak.
Sure, financial services companies will use artificial intelligence and data analytics in carbon accounting as they have in financial accounting, but “they will always have a role to play for people.” “, Aggarwal told CNBC.
The loser: Supply chain suppliers with a messy scope 3 emissions
In the SEC’s rule proposal, companies need to disclose their direct greenhouse gas emissions, called emissions in scope one, and the emissions from electricity and other forms of energy that they use, called range two. Both are relatively easy to follow.
But the proposal also requires companies to track emissions in the three” range.if material“as the SEC said. Scope triple is the indirect emissions that come from a company’s supply chain and can be very difficult to reliably track.
Companies with complex international supply chains may find this particularly difficult Joe Schloessersenior director at ISNhelps companies monitor and audit contractors and suppliers to ensure that they meet various standards, including ESG (environmental, social, corporate governance) practices.
“Industries with more complex supply chains, especially those that depend on international suppliers (apparel, pharmaceuticals, manufacturing), will face more challenges in the short term and ultimately. can bring parts of the supply chain or production back to local suppliers,” he said.
In general, domestic suppliers are easier to monitor, and the companies that rely on them will also have lower carbon emissions from shipping parts, Schloesser said.
Massive ESG fund shuffling
ESG funds are a huge and growing industry: Sustainability fund assets grew 9% to $2.74 trillion at the end of December 2021 around the world, according to a January report from Morningstar Direct.
The SEC’s climate rules will help investors make more legitimate climate-conscious investments because there will eventually be a standard way to compare emissions across companies and industries.
Bryan McGannon, policy director at Forum on Sustainable and Responsible Investmenttold CNBC.
With that, investors can make “apple-to-apple” comparisons, McGannon said.
Aggarwal told CNBC that this information could cut down on “laundering” in ESG funds.
“The whole definition of a sustainability fund or a climate fund is going to change pretty quickly, so I think you’re going to see a bunch of big losers there,” Kawamori told CNBC.
ESG funds, on the other hand, have been investing in closely tracking and understanding emissions data from their component companies – including “some very large funds … especially in space… private equity” – would be in a stronger position, Kawamori said.
