A new proposal from the SEC would require companies to be more transparent about climate-related risks. Such increased disclosure could lead to greater corporate accountability, which could lessen the impact of climate change, especially in vulnerable communities across the globe.
by Sharmeen Contractor and Daniel Mulé, Policy Lead, Extractive Industries Tax and Transparency
As climatic events increase in frequency and severity, frontline, and vulnerable communities in the US and across the globe face devastating impacts. But let’s be clear: climate change is not inevitable; there is a lot we could be doing to reduce the speed of it and mitigate the damage.
A big part of the problem is that corporations--especially oil, gas, and coal companies--continue to do “business as usual,” where they keep pushing an extractive model.
Indeed, the latest report from the Intergovernmental Panel on Climate Change (IPCC) lists fossil fuel interests as one of the biggest obstacles to addressing climate change. Since 1998, over 70% of the global industrial greenhouse gas (GHG) emissions can be attributed to just 100 fossil fuel producers.
A new proposal from the US Securities and Exchange Commission (SEC, or the Commission) would be to mandate climate-related risk disclosures from public companies; this is a landmark step to at least bring those emissions (from all industries) out of the shadows. This proposal would put senior management and boards in the hot seat over a corporation’s climate risks and impacts. Increased climate-related disclosures could result in a comprehensive understanding of corporate behavior on climate and distinguish real commitments from public relations blitzes.
Recently, MSCI (which rates companies on their environmental, social, and governance (ESG) factors), scanned a sample of companies on readiness to combat climate change; it revealed that more than 70% were unprepared to meet disclosure requirements.
By compelling companies to increase transparency and accountability, the SEC can push them to stop presenting greenwashing narratives and false solutions, and instead encourage company- and portfolio-level action to lower emissions and pollution levels, especially in vulnerable communities across the globe.
Growing consensus on increased disclosures of all emissions and risks
A big strength of the SEC’s proposal is alignment with international standards; it has adopted the emissions definitions of the GHG Protocol, and is modeled on the recommendations from the Taskforce for Climate Related Disclosures (TCFD). The TCFD is widely adopted by global companies, countries (including China, Canada, New Zealand, United Kingdom), G20 and G7 Finance Ministers and Central Bank Governors, and international standard setters.
The level of detail in the proposal is impressive; it requires companies to provide increased climate-related disclosures that exceeds those provided in sustainability or climate reporting and builds upon a growing international call for more disclosures.
In doing so, the SEC aims to level the playing field by endorsing a clear and consistent standard that can allow comparability across the various disclosures of US-listed companies. The breadth and scope of oversight required, along with scrutiny on board and management, sends a strong signal that climate reporting is no longer a peripheral duty of the board, and that overly rosy sustainability reports and vague climate targets cannot be the accepted norm on company action to combat change.
The fine print
The proposed requirement to disclose Scope 1 (direct emissions from owned or controlled sources) and Scope 2 (those generated from purchased energy) emissions represents a good first step-despite attempts by industry associations and corporations to limit such reporting, as seen in submissions to the comment record the SEC since March 2021.
Additionally, the requirement that emissions be reported in gross-rather than net-terms can prevent companies from understating their emissions impacts. This can increase pressure on high carbon emitting companies to focus on genuine climate action, which can have huge implications for reducing land inequality and food insecurity (as documented in the Oxfam report "Tightening the Net”).
The bulk of emissions in high carbon risk sectors (including fossil fuels and agriculture) are from Scope 3, which includes all indirect emissions that occur in company value chains. The SEC recognizes Scope 3 as a relevant category for disclosure-though only if “material,” or significant to investors, or if targets are set.
While this represents an important milestone, there remains room for interpretation. In the food and beverage sector, most Scope 3 emissions would be linked to land use changes that have important social and environmental consequences: the loss of forest cover and natural vegetation driven by deforestation leads to devastating impacts for millions who depend on land for food, livelihood, and a way of life. Within the oil and gas industry the (Scope 3) end uses of petroleum products contribute more to GHG emissions than any other industry. As a result, these Scope 3 emissions are likely material for companies, but the SEC could go further and make that explicit requirement.
As we transition to cleaner energy sources, there is broad consensus that medium term oil and gas prices will fall. As many of us have noted (including Oxfam, its Publish What You Pay US allies, and oil and gas investment analysts), this will profoundly impact the valuation of oil and gas projects and the companies operating them.
The SEC can help safeguard against these transition risks impacting investors’ bottom line by ensuring that company assessments of the risks are disclosed. These disclosures can also help petroleum-rich countries better assess potential risks to government revenues as well, allowing them to make better decisions about natural resource governance.
The proposal should also adopt a rights-based approach to climate change using the United Nations Guiding Principles on Business and Human Rights as a framework. In the past decade, as the climate justice movement has boomed globally, it has led to the increasing use of litigation strategies to hold governments and corporations accountable.
It is imperative that human rights risks and impacts be disclosed since they are inextricably linked to climate change.
What can you do?
We expect severe challenges to the SEC’s authority from climate-blind legislators, states, companies, and trade associations; these could delay implementation and slow down necessary and urgent action to combat climate change. We don’t have time for that.
According to the IPCC report, global GHG emissions were highest in the last decade (2010-2019) even though the period predicted a slow growth rate. The report notes that GHG emissions must peak before 2025 and then drop by at least 43% by 2030.
If left unchecked, climate change will mitigate poverty eradication efforts, and disproportionately impact some of the poorest regions across the globe.
Increased disclosure will lead to greater corporate accountability, which could lessen the impact of climate change, especially in vulnerable communities.
Oxfam supports the finalization of the proposal (and other efforts) to improve climate disclosure. You can play a part to ensure the SEC adopts a robust climate proposal:
- As a concerned global citizen, you can comment on the rule showing your support for increased disclosure by publicly listed companies.
- As a constituent (especially if you live in a state that is likely to challenge the SEC’s authority), you can write to your elected representative to not oppose it.
- As an employee of a company that is facing increased regulatory scrutiny, you can encourage your employer to support the proposal and ensure your company doesn’t fund trade associations that challenge it.
- As an investor, you can write to the SEC providing data and cost benefit analysis of the usefulness of this rule in ensuring better risk management.
The deadline to provide the SEC with comments is June 17, 2022; information on How to Submit Comments to the SEC.