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A Market-Driven Approach to Change: Climate Disclosure Explained

March 3, 2021, 10:31 AM

The last few months have seen a dramatic uptick in the number of companies voluntarily telling the world how much carbon they emit and how they plan to deal with a changing climate.

The shift started happening long before President Joe Biden took office, but his firm stance on climate change is providing a boost to investor-grade disclosure. Those dynamics have caught the attention of the nation’s CEOs, who are swiftly climbing on board even though they don’t legally have to.

So what’s the goal of these disclosures—voluntary or not—and what role do they play in actually tackling climate change?

What’s in a report?

Generally speaking, climate disclosures are statements in which companies reveal how climate change will affect their businesses. Those impacts fall into two buckets: the physical threats to a company’s operations, and the risks and opportunities posed by climate-related transitions, such as the switch to green energy.

The disclosures can either paint a rosy picture—say, if a company thinks it’s going to save millions of dollars by switching to renewable energy—or a gloomy one, for example, if a firm has factories in flood zones that are facing rising seawaters.

Does disclosure help reduce carbon emissions?

If a company has to pull back the curtain on its emissions, and if activist investors then divest in a significant way, the company could be forced to clean up its practices. In an extreme case, it might even be driven out of business.

Precise estimates on how much carbon could be kept out of the atmosphere as a result of more transparent reporting are hard to pin down. But it’s fair to say the reductions could be dramatic, especially when a company’s entire supply chain is taken into account. Industry accounted for 22% of greenhouse gas emissions in 2018, making it the third-largest contributor after transportation and electricity production, according to the Environmental Protection Agency.

To be clear, this isn’t an effort to directly reduce greenhouse gas emissions, like fuel economy standards or carbon capture efforts. At its core, climate reporting is about leveraging market forces to price in climate change and its effects, and making sure investors have as much information as they can get.

It’s also not a perfect mechanism for punishing bad actors. The idea of reporting requirements impacts all companies equally, meaning there could be unintended consequences even for companies that are trying to fight the climate crisis. For example, a solar panel manufacturer could have to disclose risks to its business if one of its factories is threatened by rising sea levels or more frequent hurricanes or wildfires.

What do companies have to disclose?

Not much. Companies don’t have to reveal any quantitative data about their greenhouse gas emissions to the Securities and Exchange Commission. Certain industries in a handful of states and localities, such as power companies in California, do have reporting requirements. Large emitters also have to report their emissions to the Environmental Protection Agency.

The SEC put out guidance in 2010 telling companies they should disclose climate change-related developments that are material to their businesses. But that guidance doesn’t carry the force of law, and it gives companies leeway to decide what is and isn’t material.

Nevertheless, many companies voluntarily share detailed metrics about their greenhouse gas emissions and the business risks they face. Ateli Iyalla, North American managing director at the Carbon Disclosure Project, said 75% of the S&P 500 revealed at least some climate data last year through CDP’s proprietary platform.

Historically, the holdouts have been large carbon emitters, but even that’s changing: for example, in February, mining giants Glencore Plc and Rio Tinto Plc, which rank among the world’s biggest corporate carbon emitters, committed to reveal their annual greenhouse gas emissions as part of a campaign started by billionaire hedge fund manager Chris Hohn, and Exxon Mobil Corp. has been the target of activist investors who want the company to do more climate reporting.

So why do companies do it?

Mostly because investors and consumers have been demanding more visibility into big companies’ climate performance. Investors are increasingly recognizing that climate change can play a huge role in a company’s profitability, and consumers are growing more insistent that companies’ values match their own.

“There has been a sea change in terms of a generational shift, and a view of how impactful climate change is on people’s lives,” said Maura Hodge, national ESG assurance leader at KPMG. “As a result, we’re seeing investors and regulators starting to demand more information.”

Sometimes disclosure also gives companies access to more or cheaper capital. That can come in the form of green bonds, which let companies raise money to take action on reducing their greenhouse gas emissions, or sustainability-linked bonds, which are financial instruments whose interest rates are linked to a company hitting its emissions goals, according to Hodge.

Will more companies jump on board?

Yes, according to Pierre-Francois Thaler, CEO of EcoVadis, an ESG ratings provider for global supply chains.

Having ambitious climate goals and a plan to reach net-zero emissions “has become the new corporate gold standard,” said Thaler, suggesting that companies may find themselves at a competitive disadvantage if they don’t publicly make those commitments.

Iyalla agreed, saying the disclosure rate among companies has grown 5% over the last five years.

To Learn More:

—From Bloomberg Law

SEC and Corporate Climate Reporting: New Review Explained

Proposed SEC Climate Disclosure Mandate Draws Republican’s Ire

SEC Gets New Call to Mandate Corporate Climate Disclosures

Considering ESG? Three Ways Lawyers Can Help

—From Bloomberg News

`Portfolio Warming’ Is the New Climate Anxiety for Fund Managers

Fink Demands Net-Zero Disclosure as Climate Push Strengthens

Investor Pressure Boosted Climate Disclosures in 2020, Says CDP

To contact the reporter on this story: Stephen Lee in Washington at stephenlee@bloombergindustry.com

To contact the editor responsible for this story: Chuck McCutcheon at cmccutcheon@bloombergindustry.com

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