“We Cannot Improve What We Do Not Measure” Supporting the SEC’s Proposed Rules on Climate Risk Disclosures

3 min read

In a time where we are grappling with a looming climate crisis, there’s hope in the limitless opportunities that are set before us to transition towards an equitable and clean future. One of the greatest opportunities for systemic change is through the institutionalization of sustainability into our economy. On March 21st, the U.S. Securities and Exchange Commission (SEC) released proposed rules for mandatory climate-related disclosures from all publicly listed U.S. companies.

The proposed ruling, if adopted as is, would require corporations to communicate the following information utilizing the globally recognized TCFD framework and GHG Protocol standards: 

1. Carbon Emissions 

   1. Scope 1: A company’s direct carbon emissions, which typically include fuel consumption at or using owned and leased assets 

   2. Scope 2: A company’s indirect emissions mainly tied to purchased electricity  

   3. Scope 3 (Mandatory for some companies): Indirect carbon emissions that stem from a company’s company’s value chain, but are not directly controlled or owned by the business

1. Climate-related risks: 

   1. A company’s climate-related risks and governance structures to manage risks 

   2. The number of climate-related risks identified that have had or are likely to have a financial impact on the business

   3. The number of identified climate-related risks that have affected or are likely to affect the company’s strategy, business model, and outlook 

   4. The impact of climate-related events (e.g. severe weather events) and transition activities  

As environmentalist Paul Hawken stated, “business is the only mechanism on the planet today powerful enough to produce the changes necessary to reverse global environmental and social degradation.” To move towards a more sustainable future, companies must first establish a baseline. Every company must have an understanding of its standing with regard to environmental impact, corporate citizenship, diversity efforts, etc. This data is essential when addressing social and climate risks. We can set ambitious goals, but we must know what our present baseline looks like so that we can make meaningful progress.  

During the pandemic, we observed that businesses with stronger Environmental, Social, and Governance (ESG) profiles fared better and were more resilient to abrupt internal and external changes. A study by Morningstar in 2020, showed that “ESG funds tended to capture less of the downside during the market turmoil caused by the pandemic in comparison to non-ESG funds.” This shows that climate and social risks are financial risks and should be managed accordingly.

But where is the “S” in ESG disclosures here? 

When we speak about sustainability, we often think about environmental factors, but the term sustainability sits at the intersection of social justice and climate justice. “Equity is a climate solutions multiplier,” says Jamie Alexander, Director of Drawdown Labs at Project Drawdown. For example, studies have shown that investing in gender equity can lead to a major reduction in global carbon emissions. 

One group, Women in Climate Tech (WiCT), has put together a task force to better communicate and showcase risks and opportunities related to the relationship between equity and climate change. They are starting with gender equity and expanding to look at equity as a whole soon after. Similarly, the Biden administration has stated that diversity and inclusion is a priority topic for the SEC. In spring 2021, the SEC shared that human capital, “including workforce diversity and corporate board diversity” will be a priority rule-making area. 

How can I support? 

This is a pivotal moment for integrating sustainability into our capital markets. Until we can measure social and environmental impact in a clear, consistent, and comparable manner, we cannot move effectively toward addressing social inequities and climate risks. Over 25 countries have already mandated some level of ESG disclosures and the US mandate will further this global movement. 

Though there is bipartisan support for this ruling, there is still significant opposition from corporations that are heavily dependent on fossil fuels and stakeholders who feel that the SEC is proposing rules that are outside of the organization’s scope. However, there is ample evidence showing climate-related risks quickly spill over into financial risks and as a result, should be made transparent to investors. 

Individuals:

• Reach out to your congressional representatives. Contact your elected officials and ask them to protect your investments by enacting the Standardization of Climate-Related Disclosures. Show support for future rulings associated with diversity, equity, and inclusion. 

• Ask your employers or businesses you are loyal to if they have showcased support for this ruling. Tweet, DM, or email, and share why support for this ruling is important.

• Activate on social media. Need help coming up with a post? Try: We can’t improve what we don’t measure and we can’t hold each other accountable for a sustainable future without clear and comparable data. Proud that @SECgov has proposed #ESG climate disclosure rules for publicly traded companies. Thank you @garygensler! https://www.sec.gov/news/press-release/2022-46

Companies and Investors:

• Submit comments. Take your time to learn more about the SEC proposal and submit your comments by email or mail. The comment period will not close any earlier than May 20, 2022. 

• Co-sign an NGO’s submission. For example, you can find Ceres’ letter to the SEC here.  

Measure your impact 

If you are a business (no matter what size!) that supports this proposal, consider beginning to measure your social and environmental impact and developing an ESG strategy. Baobab can help your business seamlessly obtain a baseline of where you are at and how to build a more responsible and resilient future for your company. Later this year we’ll be launching a simple, self-service tool to help you build out your ESG strategy and identify value-creation opportunities for your business by driving positive impact! Reach out at hello@baobab.eco for any questions or to learn more about ESG. 

Together, we can actively build a future that works for everyone.