My first corporate boss had a phrase he relied upon so often that he framed a printout on his office wall: “You Can’t Manage What You Can’t Measure.” The phrase has often come back to me when considering environmental topics. Assessing the scope and magnitude of climate risk is daunting; it’s hard to tell where to start.
The U.S. Securities and Exchange Commission (SEC) has proposed a rule to dramatically expand climate risk reporting. (506 pages in full, also summarized here.) Whether or not it makes climate risk manageable, the SEC intends to support measurement of companies’ climate exposures.
The SEC governs financial statements, the filings made by all U.S. publicly-traded companies. Since the 1970s, SEC guidance has required businesses to mention major environmental costs or risks to their businesses, like the costs of compliance with emission regulations and disaster risks to their locations. The new proposal dramatically increases the scope of this requirement.
The rule calls for reporting entities to list as much environmental detail about their businesses as they can. Any climate-related risk that could affect costs or revenues by 1% must be detailed. All Scope 1 and 2 emissions (made directly by the company and from its purchased utilities) would have to be reported. Companies with emissions targets would have to detail not just their goals, but measured progress and a plan to achieve them.
The requirements are less stringent for Scope 3 emissions, those that are produced elsewhere in the company’s value chain. This is the broadest and most difficult category of emissions to measure. Companies must report Scope 3 emissions only if they are “material” or if the company has a reduction target. For some entities like financial institutions, direct emissions are negligible, but emissions from financed activities can be substantial.
Environmental disclosures are not entirely new. Many companies publish corporate social responsibility reports, highlighting their green efforts, with wide editorial discretion. Working groups like the Carbon Disclosure Project and Task Force on Climate-related Financial Disclosure have established voluntary reporting standards. The SEC’s proposal builds on those efforts, making them more uniform and mandatory.