The mid-term elections caused more handwringing around the SEC ESG corporate disclosures rules that are expected to be released any day. Conjecture abounds, but the most likely scenario is that a Republican-controlled House will sinch the purse strings tight and de-fund enforcement of the new regulations. But how much would that really matter?
The Train Has Left The Station
The central intent of the new ESG corporate disclosures regulations is transparency and accountability, and that train left the station quite some time ago. Companies are already responding to social pressures to do better, from environmental stewardship to human rights and economic justice. Many corporate leaders have leaned into the concept that doing good is good for business.
Consumers, already more conscious than ever before, are demanding change after experiencing economic pain, injustice, and uncertainty caused by the pandemic, the war in Ukraine, and relentless climate-related catastrophes. Regulation, or lack thereof, isn’t going to stop the train.
And, then there are the media. A quick media database search pulls up more than 100 journalists with ESG actually in their bios and titles. Those include reporters at The Associated Press, Bloomberg, and Reuters whose coverage appears in outlets across the globe. They certainly hold corporations and financial institutions accountable. Name one CEO who wants to see their company in a front-page story about toxic waste or racial discrimination.
Climate Risk is Financial Risk
The biggest criticism of the ESG corporate disclosures is the onerousness of the requirements and how much it will cost companies to comply.
In its quest to standardize reporting and provide investors and the companies themselves with a full understanding of impact and risk, the proposed rule changes would require disclosures about a public company’s climate-related risks including how those risks have or are likely to have a material impact on its business in the short-, medium, or long-term, and how they are being considered in business models and outlooks. It begs the question: Why wouldn’t companies be evaluating those risks already?
According to a 2020 CDP global supply chain report, suppliers described financial impacts of US$1.26 trillion from environmental risks by 2025. The result is estimated price increases that will cost corporate buyers US$120 billion.
Compound that with the world’s economic vulnerability related to overreliance on fossil fuels as severely evidenced by the war in Ukraine and it is hard to fathom how any responsible CEO and CFO isn’t considering these factors. As the costs will either undercut profits or get passed on to consumers, they will likely be explained in earnings reports regardless of new regulations.
Then there are the proposed Scope 1, 2, & 3 disclosures, which could be arduous if required in their entirety. Publicly held companies would have to disclose information about direct greenhouse gas (GHG) emissions (Scope 1), and indirect emissions from purchased electricity or other forms of energy (Scope 2).
In addition, and this is a biggie, they would also be required to report GHG emissions from upstream and downstream activities in their value chains (Scope 3). The qualifier is that they only need to be disclosed if the Scope 3 emissions are “material or if the registrant has set a GHG emissions target or goal that includes Scope 3 emissions.”
The Scope 3 requirements are getting a lot of pushback and may be tabled if the new rules are enacted.
When the SEC announced the proposed rules, the agency explained that these GHG disclosures are similar to those that many companies already provide using broadly accepted reporting structures such as the Task Force on Climate-Related Financial Disclosures and the Greenhouse Gas Protocol.
Companies actively promote their goals to reduce or achieve net-zero emissions because they recognize it is in their best interests, not just from a PR standpoint, but as responsible corporate citizens, and fiscally exposed entities whose own bottom line will be impacted by climate change.
20 Years of Momentum Behind the Movement
The term ESG first appeared publicly in a 2004 United Nations report by a consortium of prominent financial institutions. The title of that report was “Who Cares Wins.”
With 20 years of momentum behind the movement, even if the SEC disclosures rules get caught in a political vortex, the call for transparency and accountability will continue and companies will answer the call because it is in their best interests. The ones who care will win.
