Love it or hate it, climate reporting may be inevitable

Love it or hate it, climate reporting may be inevitable
Legislation in California that will likely become law goes much farther than an SEC proposal on emissions reporting for public companies.
SEP 13, 2023

It would be hard to overstate how consequential a pair of bills in California will be in shaping the future of greenhouse gas emissions reporting in the U.S.

On Tuesday, the state legislature passed a bill, SB-253, that will require businesses with more than $1 billion in annual revenues to report emissions beginning in 2026. And that only applies to the greenhouse gases those businesses emit and those that come from the energy they use — known as Scope 1 and 2 emissions. By 2027 those businesses will also have to report the more encompassing Scope 3 emissions, which apply to materials in their supply chains and the greenhouse gases that their products emit after being sold to customers.

The other bill, SB-261, will make companies with at least $500 million in revenue that do business in the state report climate-related risks and opportunities.

The development is significant for two major reasons: California’s law, assuming Democrat Gov. Gavin Newsom signs the bill, will be the de facto law of the land nationally; and the state law goes far beyond what the Securities and Exchange Commission has proposed.

Unlike the SEC’s Enhancement and Standardization of Climate-Related Disclosures for Investors, a final version of which has yet to be published, California would not only require a heightened level of disclosure – it would also do so to companies both public and private.

“It could become a de facto national standard until the SEC acts. It does in fact go further than the SEC’s proposal,” said Bryan McGannon, managing director at US SIF: Sustainable Investment Forum.

For example, the SEC’s proposed rule, which was issued last year, would only require Scope 1 and 2 emissions reporting for many companies. Big public companies for which Scope 3 emissions are considered material, or have Scope 3 emission-reduction targets, would have to report those.

That gives companies some wiggle room — but not if they plan on doing business in California, which is considered the fourth largest economy in the world.

This also wouldn’t be the first time the California effect has pushed major companies to make changes on a national basis. Because the state has the distinction of being the only one in the U.S. to set its own automotive emissions standards — an exemption from federal law it has had since the ’70s — it has continually pushed car makers to produce lower-emitting, more fuel-efficient vehicles.

“Auto makers are not trying to build a California car and then a rest-of-the-country car,” McGannon said, noting that a handful of other big states have followed — although they can’t draft their own standards, they can adopt California’s.

The emissions reporting issue “quickly becomes a very similar circumstance, where businesses are eager to be in the fourth largest economy in the world,” McGannon said. “And this is a part of doing business in that economy.”

Of course, many businesses don’t want higher standards forced on them — and there has been no shortage of comments, both to the state and to the SEC, about that. The majority of comments to the SEC have favored higher disclosure standards, but lobbying groups and trade associations in many cases have argued against them. Objections range from difficulty in collecting and reporting Scope 3 data to added costs and concerns that the SEC is trying to do too much at once — that several climate-related proposals it has made are connected and that commenters haven’t had enough time to review everything.

But it’s also worth noting that the SEC and California are not alone in moving to make companies report their climate and emissions data. The EU, for example, will ask businesses in many cases to report Scope 3 emissions.

And then there are shareholders, which have pushed many companies in the U.S. and abroad to at least start collecting such data, if not go beyond and set targets to reduce their carbon footprints. While there is obviously an imperative among companies and shareholders to work toward sustainability for the good of the planet, many also see climate-related risks and opportunities as financially material. There are existential and economic incentives at play.

All that is to say, it seems very likely in the near future that companies will have to provide climate and emissions data. Even if the SEC waters down the final version of its rule, or if California is challenged in court, it’s hard to imagine that a more stringent reporting system isn’t eventually put in place. And of course, major U.S. companies that do business in Europe will still have to report emissions data.

Today, investors and asset managers don’t all agree on whether public companies should focus on improving their environmental and social practices, at least as it relates to financial returns. That is why products from firms like Strive Asset Management, which focuses on voting against ESG-related shareholder resolutions in proxies, have been popping up and gathering money.

But importantly, many public companies are voluntarily reporting emissions data — even Scope 3. To the extent that investors value that information, it would seem important to ensure that companies collect and report it in consistent ways.

For Scope 1 and 2 data, the SEC and California would require that companies use third parties to assure the information is property gathered. And California will likely require Scope 3 emissions to have third-party assurance starting in 2030.

Consulting firms and the big four accountants see the writing — Deloitte, Ernst & Young, PwC and KPMG have rolled emissions reporting into their services, McGannon noted. While that’s a business opportunity for the firms, the costs of engaging them will be less for many clients than trying to do climate reporting in-house, he said.

 “There’s been a huge increase in the number of firms that are providing those services to companies,” he said. “You’ll continue to see that grow dramatically when there’s a law in place.”

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