The US Securities and Exchange Commission seal hangs on the wall of Washington’s SEC headquarters.
Jonathan Ernst | Reuters
On Monday, the Securities and Exchange Commission announced a proposal for a new rule requiring companies to disclose the risks associated with climate change and greenhouse gas emissions. It will take some time for the proposal to be enacted, but once it is enacted, its implications will be widespread.
Standardization of climate disclosure creates a unique industry of professional and technical solutions for tracking, validating and reporting those risks. Companies that already voluntarily track and disclose emission data may have an advantage over their peers.
The SEC’s climate rules also increase transparency for investors, customers and other stakeholders to build data-driven cases for cleaner alternatives. Climate change delays can lead to loss of money as customers and investors shift their money to more environmentally friendly options.
Winner: A company that manages carbon emissions
Companies that use clean energy and have relatively low carbon emissions will benefit from the SEC’s climate rules, while carbon-intensive companies will be “lost over time,” Washington, DC’s independent climate change. Claire Healy, director of the think tank, said. I told E3G and CNBC.
Clear emissions data provide shareholders, customers, and other stakeholders with a solid barrier to imposing emissions and other irresponsible companies for climate impacts, said Lina Georgetown’s professor of finance. Agawal says.
Aggarwal told CNBC that there is historical precedent for clear information that allows investors to sell from companies that do not meet certain ethical standards.
For example, student protests helped universities sell funds from their investment in fossil fuels. In addition, sovereign wealth funds and pension funds such as CalPERS in California were sold from tobacco stocks.
“It may have hit returns in the short run, but in the long run we’re reducing risk,” Agarwal said.
But that doesn’t mean that SEC climate data will be the only part of a company’s sustainability story.
“The rules proposed by the SEC are another quiver designed to change investor calculations and lead to faster decarbonization,” Healy told CNBC. “It clearly impacts final investment decisions such as government policy tightening, explicit / implicit carbon pricing, risk of asset stranded, shareholder pressure, social licensing to operate, staff retention, etc. Combined with other factors that give. “
Loser: Companies with surprisingly poor carbon dioxide emissions
Companies with surprisingly high carbon emissions can actually be at a disadvantage when the new rules come into force.
“I think these companies will suffer in two ways,” Aggarwal said. “The cost of capital goes up and profits go down. Therefore, it is both the commodity and financial markets that affect these companies.”
“I think the trend has already begun, but now, as transparency becomes more pronounced, it will be easier for both consumers and investors to see exactly what is happening,” she said. Added.
However, this rule is not a fatal issue for companies that have high emissions but have already disclosed their implications. It’s also not a big deal for companies that don’t yet have a viable alternative.
For example, manufacturing, industrial chemicals, cement, pulp and paper are energy-intensive industries, and most investors know this, Brandon Owens, vice president of sustainability for the business consulting firm Insight Sourcing Group. Says.
“I don’t think they’re suddenly expected to be decarbonized,” Owens told CNBC. “We want transparency. We can make decisions about it. We want to know that we have plans to start working on carbon dioxide emissions.”
Winners: Compliance Experts and Software
Companies need help understanding how to track and report climate risks. According to Rich Sorkin, CEO and co-founder of Jupiter, a climate risk analysis company, there is a need for advisors, consultants and auditors with that expertise, including many celebrities in insurance and management consulting.
Companies that can automate the carbon accounting and reporting process will also work.
In this area, “We can achieve Salesforce-type success,” said Kentaro Kawamori, CEO of Persefoni, a software platform that helps businesses analyze, manage, and report on carbon dioxide emissions. ..
“Just as Salesforce created a customer record recording system, a company like us (with one or two big winners) will create a carbon accounting recording system,” Kawamori said. rice field.
Sure, financial services companies use artificial intelligence and data analysis in carbon accounting just like financial accounting, but “they always play a role for humans,” Aggarwal told CNBC.
Loser: Supply chain vendors with troublesome Scope 3 emissions
The draft SEC rules require companies to disclose direct greenhouse gas emissions, called Scope 1 emissions, and emissions from their electricity and other forms of energy, called Scope 2. Both are relatively easy to track.
However, the proposal also requires companies to track Scope 3 emissions “in critical cases,” as the SEC stated. Scope 3 emissions are indirect emissions from a company’s supply chain and are extremely difficult to track reliably.
According to Joe Schloesser, Senior Director of ISN, companies with complex international supply chains can find this particularly difficult. ..
“Industries with more complex supply chains, especially those that rely on international providers (apparel, pharmaceuticals, manufacturing), face more challenges in the short term and are ultimately part of the supply chain or manufacturing. We may return the department to a domestic provider, “he said. ..
Generally speaking, domestic suppliers are easier to monitor, and companies that rely on them also have lower carbon emissions from the transportation of parts, Schlesser said.
Shuffle big ESG funds
ESG funds are a huge and growing industry, according to a January report from Morningstar Direct. Sustainable fund assets increased 9% to $ 2.74 trillion at the end of December 2021.
The SEC’s climate rules help investors make more legitimate climate-friendly investments, as there is ultimately a standard way to compare emissions across companies and industries.
“One of the benefits of having a standardized framework for reporting this information is that we can get clear, comparable and reliable data that we don’t currently have,” said Sustainable and Responsible. Brian McGannon, Head of Policy for the Investment Forum, said. , Told CNBC.
This will allow investors to “compare apples to apples,” McGannon said.
Aggarwal told CNBC that this information could reduce “greenwashing” within ESG funds.
“The overall spread of the definition of a sustainable fund or climate fund changes fairly rapidly, so I think there are a lot of big losers out there,” Kawamori told CNBC.
Conversely, ESG funds that have already invested in rigorous tracking and understanding of emission data from component companies, including “some very large funds … especially private equity spaces,” are more powerful. Kawamori said he was in a position. ..