SEC proposed disclosure: Worsening climate change is no longer an acceptable business model
A recent UN report described the climate emergency: punishing climate impacts today and existential risks ahead. In the words of the UN Secretary-General António Guterres, the report is an “atlas of human suffering and a damning indictment of failed climate leadership,” warning that far worse is coming, including a series of irreversible and potentially catastrophic tipping points as we pass the 1.5 degrees Celsius guardrail for global warming set up by the Paris Agreement. This “fat tail” risk should scare all of us, including investors.
President Biden has made climate protection one of his priorities and promised an “all of government” response to the climate emergency. Fittingly, the Securities and Exchange Commission (SEC) last week released a proposed rule that would make it mandatory for corporations to disclose their climate risks to investors, noting the “tens of trillions of dollars [that] support climate-related disclosures because they recognize that climate risks can pose significant financial risks to companies.”
The SEC’s proposed rule comes at a critical time. This is the “do-or-die” decade to slow warming.
The proposal mandates that companies report on the risks climate change poses to their bottom line, in the short, medium and long term. This is an important step, but the risk assessment will be incomplete if it fails to account for the fat tail risks associated with the nonlinear feedbacks in the climate system. Disclosure of these often under-appreciated risks is needed to fully inform and protect investors.
Importantly, the proposal also calls for corporations to tell the public how their operations exacerbate or mitigate climate change risks and to indicate what transition plans they have in place; in other words, how much are they part of the problem and what are they doing to become part of the solution?
Corporations have faced similar challenges before, for example, by having to consider human rights impacts of their supply chains, including the use of child labor. Child labor is no longer acceptable as part of a business model, no matter how profitable, and neither should business practices that exacerbate the climate crisis.
The proposed SEC rule would subject all corporations to public scrutiny, with uniform and frequent reporting, making sure that disclosure is understandable, comparable and useful for investors and other stakeholders. It would expose the risk of those who have been burying their heads in the sand as the water rises, as well as provide a boost to those taking aggressive action to reduce climate risks. In sum, investors will know where companies stand on climate and can act accordingly with their investments.
The SEC’s final disclosure rules should ensure that all of a company’s climate emissions are disclosed (Scope 1, 2 and 3 — when these are material), along with a transition plan that has sufficient detail to help investors evaluate whether a company has an effective strategy to achieve its short-, medium-, and long-term climate-related goals — and ultimately, whether the company is helping or complicating efforts to alleviate the climate emergency.
In addition to informing investors, corporate climate disclosure also will promote internal corporate culture change that is as important to the bottom line as it is to our collective climate challenge. Through mandated corporate climate disclosures, corporate failures to address climate are identified, company policies are established to tackle climate risks and impacts, management teams get hired to help steer the company in climate-friendly directions, emissions reduction targets are set and tracked, while corporate climate performance gets evaluated. This is how learning and innovation happen.
What does this mean for what is reported and how? The series of recent UN climate reports from the Intergovernmental Panel on Climate Change (IPCC) make it clear that keeping 1.5 degrees Celsius within reach requires getting to net-zero CO2 emissions as fast as possible, which is essential for stabilizing the climate in the longer term, while also making deep cuts to the short-lived super climate pollutants, including methane, hydrofluorocarbon refrigerants and black carbon — reductions essential for slowing warming in the near term.
The SEC and companies need to recognize how different strategies impact warming over different time horizons and why it is important to report short-lived and long-lived pollutants separately, using metrics that are aligned with achieving temperature targets, namely to limit warming to 1.5 degrees Celsius. This would include reporting on the warming impact a given pollutant has over the next 20 years, in light of the likelihood of exceeding the 1.5-degree guardrail as soon as the 2030s.
Disclosure is the least we can ask from companies. Climate change is material to everyone, including every corporation and every investor. Strong SEC disclosure rules will help speed the corporate re-alignment that is essential for keeping the climate safe.
It took the corporate sector decades to accept that there are human rights dimensions to the business model. In the face of accelerating climate impacts, the SEC must ensure that companies take immediate action. Otherwise, in the words of Guterres, “If we continue with more of the same, we can kiss 1.5 goodbye.”
Jorge Daniel Taillant is founder of the Center for Human Rights and Environment, as well as a climate justice policy adviser at the Institute for Governance & Sustainable Development (IGSD).
Gabrielle Dreyfus, Ph.D., is chief scientist at IGSD and an adjunct professor at Georgetown University.
Durwood Zaelke is president of IGSD Washington, D.C. and Paris, and an adjunct professor at the University of California, Santa Barbara. He is co-author of “Cut Super Climate Pollutants Now!: The Ozone Treaty’s Urgent Lessons for Speeding Up Climate Action.”