On Monday, the U.S. Securities and Exchange Commission (SEC) proposed a new rule that would require companies to disclose some of their greenhouse gas emissions in a standardized way, and to explain to investors how climate change could impact their financial performance.
According the National Oceanic and Atmospheric Administration, extreme weather events in the United States caused at least $145 billion in damage in 2021; rising global temperatures are expected to increase the severity of hurricanes and the frequency of wildfires, destroying assets owned both by publicly-traded companies and ordinary families around the world.
Researchers at the IMF and the University of Cambridge have predicted that climate change, in the absence of substantial reductions in global emissions, will lower real per capita GDP by 2.5% in 2050 and 7.2% in 2100. Since Millennial and Gen-Z savers won’t hit retirement age until roughly 2050, it’s clear that greenhouse gas emissions pose a serious risk to their retirement portfolios. Vanguard currently offers target-date funds that run through the year 2065.
“When companies emit greenhouse gas, they are incurring a debt as if they had taken out a bank loan,” said Rick Alexander, the CEO of Shareholder Commons, a non-profit that advocates for the interests of shareholders, including retirement savers, with diversified investment portfolios. “The difference is that all investors—indeed all participants in the economy—are on the hook because carbon-intense business practices threaten to impose unmanageable climate debt on nearly all investment portfolios. The proposed new disclosure rules will provide investors with information they need to address this growing threat to their savings.”
Although some of the largest publicly traded companies already disclose greenhouse gas emissions, including Microsoft, Coca-Cola and Amazon, disclosures vary from company to company, which can be frustrating for investors, said Christina Herman, program director at the Interfaith Center for Corporate Responsibility, an investor network whose members manage more than $4 trillion in assets. “Standardized reporting, mandated by the SEC, will give investors what they need, which is a uniform location where this information can be found, and consistent and comparable data for use in making investment decisions,” Herman said.
What’s In The Rule, And What’s Missing
Scientists, economists and policy makers put greenhouse gas emissions into three categories: Scope One, Scope Two and Scope Three.
Scope One emissions are the company’s direct emissions from the facilities and vehicles it owns. Scope Two emissions are the company’s emissions from any electricity it purchases, plus heating and cooling. But for many companies, Scope Three emissions are the biggest category. Those are the emissions created by the use of the products the company sells, or the goods and services (other than electricity) that the company buys.
According to S&P Global, for a major oil or gas company, Scope Three emissions would typically be 85% of the total. And that makes sense. As an example, ExxonMobil’s biggest contributions to climate change come when businesses and consumers burn the fuel that the company sells, not when ExxonMobil drills for oil.
Scope Three emissions can also be high for retailers like Amazon or Target which sell goods made by other manufacturers, like Samsung, Procter & Gamble or Unilever. According to reporting by Will Evans at Grist, Target currently includes these Scope Three emissions when they report greenhouse gases to investors, while Amazon excludes those same emissions.
The proposed SEC rule calls on companies to disclose their Scope One and Two emissions (along with the financial risks that the company faces due to climate change), but says that companies only have to disclose Scope Three emissions if they’ve publicly stated a Scope Three target, or “if material.”
That has some advocates worried. Lena Moffitt, chief of staff at Evergreen Action told Politico, “Leaving it up to issuers to determine the materiality of Scope Three emissions, and shielding those issuers from liability for providing false information, would allow issuers to omit the majority of their emissions from their disclosures.” Ceres, a Boston-based coalition of more than 500 investors, found that 65% of investors who submitted public comments to the SEC asked the agency to require disclosure of Scope One, Two and Three emissions.
What The Rules Would Mean For Investors
Investors who are worried that climate change will have a negative impact on their portfolio, or who are personally worried about climate change’s impact on the planet, will have more information if these rules are finalized. That information could help them make smarter investment decisions – or change how these investors vote in shareholder elections. Under current securities law, shareholders can vote out corporate directors if they’re unhappy with a company’s strategy or its handling of a risk, although most retirement savers and retail investors don’t exercise their voting rights.
And since a growing number of companies have made promises that they’ll be “Net Zero,” this new information will help investors figure out whether or not companies are making progress — or if they might have to spend a significant amount of money or attention to reach their goal.
In a statement released Monday, SEC Chair Gary Gensler said, “Investors with $130 trillion in assets under management have requested that companies disclose their climate risks,” indicating a high level of investor interest in this issue. In 2021, shareholders at AutoZone, General Electric and Sysco won majority votes in “Say on Climate” shareholder resolutions.
How Investors and Retirement Savers Can Speak Up
Although The Wall Street Journal reported on Tuesday that investors are “largely supportive” of the SEC’s proposal, the rule also faces powerful opposition from special interest groups. Trade associations and state officials are expected to sue to stop the rule from taking effect, which is why supporters of the rule have encouraged other investors to express their opinion to the SEC.
The proposed SEC rule will be open for public comment once it is published to the Federal Register, and will remain open until at least May 20, 2022. Because the SEC’s mission is to protect investors, commenters are encouraged to explain how they think the rule might impact their investment decisions, investment performance, or how they would vote in shareholder elections.
Investors and retirement savers who are concerned about climate change can also:
- Vote in favor of shareholder resolutions that call on companies to disclose (and in some cases, to set targets to reduce) greenhouse gas emissions; upcoming companies holding votes on greenhouse gas emissions include UPS and Dominion Energy
- Choose index fund and mutual fund providers that hold corporate directors accountable for greenhouse gas emissions
- Ask their employers to include green investing options in their 401(k) plans