So, what are the GHG emissions for a mega roll of Charmin Ultra Soft toilet paper? If you guessed 771 grams, you’d be right…or, at least, according to this article in the WSJ, you’d be consistent with the calculations of its carbon footprint made by the Natural Resources Defense Council. By comparison, a liter of Coke emits 346 grams from farm to supermarket, as calculated by the company. That’s the kind of calculation that many public companies may all need to be doing in a few years, depending on the requirements of the SEC’s expected rulemaking on climate. Of course, many companies are already doing those calculations and including them in their sustainability reports. But they generally have discretion in deciding what to include. A mandate from the SEC could be something else entirely. The WSJ calls it “the biggest potential expansion in corporate disclosure since the creation of the Depression-era rules over financial disclosures that underpin modern corporate statements. Already it has kicked off a confusing melee as companies, regulators and environmentalists argue over the proper way to account for carbon.”
The WSJ reports that the Sustainability Accounting Standards Board (SASB) believes that “climate risk is likely to significantly affect 68 out of 77 of the industry categories it counts, equating to 89% of the market value of S&P Global 1200 companies, or roughly $45.2 trillion.” Better disclosure about risks arising out of climate change is likely to be included in the rulemaking—perhaps, as Gensler signaled, by requiring “scenario analyses” about how the company would adapt to physical risks and transition risks. According to the WSJ, these can “range from physical ones such as effects from extreme weather to financial risks such as if a fossil-fuel asset like a coal mine loses value. The SEC and other regulators say climate change poses specific risks to companies that investors should be told about. Among them is the risk that companies producing a lot of greenhouse gases could be avoided by some lenders, insurers or investors, either because those parties see the companies as harming the environment or because they view the companies’ businesses as vulnerable. A scientific panel working under the auspices of the United Nations stated in a report [last week] that effects of a warming climate are unequivocally driven by greenhouse-gas emissions from human activity.” The article also reports that SEC officials have “said they are considering creating a new standards-setter for ESG disclosures, along the lines of the Financial Accounting Standards Board, a body that would have expertise in matters like climate science, alternative energy and environmental risks.”
As noted above, many companies already provide volumes of environmental data in response to requests from investors and others, and that information is often used by rating firms to give companies ESG grades used by investors. According to the WSJ, however, those ratings are “inconsistent and incomplete.” The WSJ analyzed ESG ratings from three ratings agencies for 1,469 companies and found that 942 companies were graded differently by different raters: “Nearly a third of the companies were deemed ESG leaders by one or more rating firms, but labeled ESG laggards by one or another rater. Credit ratings, by contrast, are broadly consistent.” Only about a third of the companies had consistent scores. Why? Because the agencies use different methodologies and attribute different weights to issues, such as environmental or social.
And, although many companies issue sustainability reports, there is enormous variation in the quality and breadth of reporting by companies—not to mention some greenwashing and virtue-signaling. Not all companies provide climate-related quantitative data, such as GHG emissions, and even that is rarely audited. Some companies disclose emissions for one or two products, but not the whole company, or based on general data, not specific to the company. For example, the WSJ reports, “the Natural Resources Defense Council used a calculator from a green advocacy group called the Environmental Paper Network….A spokesman for the Environmental Paper Network said its calculator, which uses industry averages, is ‘a science-based, trusted, independent tool.’” Similarly, according to the WSJ, companies vary widely in how they calculate emissions from employee business travel; some consider air travel only; some include air and rail travel; some also include car travel.
Commentators cited in the article contend that companies “would take climate disclosure more seriously, and it would be more accurate, if it were mandated and checked by an outsider. ‘If you really want data that’s reliable, having it being something that’s auditable strikes me as being a basic requirement,’” the commentator remarked. A WSJ analysis of climate reporting by “the 50 largest companies in the S&P 500 found most used an outside auditor for some of the data they voluntarily reported, but verification was significantly less thorough than for financial statements.”
Devising climate disclosure requirements that would be consistent, comparable and reliable for a wide range of industries presents and also “hold up over time in a new and rapidly changing area” presents an enormous challenge. According to former SEC Commissioner Robert Jackson, “‘[i]t’s a monumental task. It’s unlikely the first cut at this will be perfect.”
The challenge too is to craft rules that would survive the political and legal opposition that has emerged. The WSJ reports that some Republicans argue that “it isn’t the SEC’s job to mandate nonfinancial disclosures.” In addition, the article continues, some industry organizations “told the SEC it didn’t have legal authority to compel disclosures and impose its value judgments.” One Republican state attorney general “wrote that ‘West Virginia will not permit the unconstitutional politicization of the Securities and Exchange Commission. If you choose to pursue this course we will defeat it in court.’ The legal threat is unlikely to deter the agency, according to Harvey Pitt, a former SEC chairman. ‘Whether or not the litigation will succeed will depend on how aggressive the SEC’s rule-making turns out to be,’ he said.”
