Published with permission from Knowledge @ Wharton, Wharton's online business journal.
A Securities and Exchange Commission (SEC) proposal to require publicly traded companies to release detailed information about their climate-risk activities could lead to significant changes for businesses, investors, and the planet, said Wharton management professor Witold Henisz.
“It’s going to give investors a lot more information to assess what a company is doing and how it’s operating, and I think it’s a great move forward,” he said during an interview with Wharton Business Daily.
The rule changes proposed last month would force companies registered with the SEC to be more transparent about their effects on the environment. In addition to reporting greenhouse gas emissions, companies would have to disclose how they calculate and manage climate risk; how that risk affects their business strategy, operating model, and financial performance; and how severe weather events impact their financials.
SEC Chairman Gary Gensler said the proposed rule changes, which are in line with President Joe Biden’s ambitious environmental agenda, are driven by investor demand for “consistent and comparable information that may affect financial performance.”
Henisz, who is an expert in ESG — environmental, social, and corporate governance — said consumers and investors increasingly want to know what companies are doing with their money. Only about 20% to 30% of registered companies voluntarily share their emissions data, and the proposal would dramatically increase that number.
“There’s a growing body of research that says when firms show us what they do, they’re a little more conscious about it, and people can put a little bit more pressure on them,” he said.
The Challenge of Scope 3
The professor highlighted a particular change in the proposal identified as Scope 3, which would require companies to disclose greenhouse gas emissions created up and down their value chain — from suppliers to consumers. That’s a big challenge, he said, because most firms don’t know what’s happening upstream or how to calculate what’s going on downstream. For example, an automaker sells vehicles that burn oil and gasoline made by a petroleum company and driven by consumers. Who’s responsible for the emissions produced by oil consumption? Henisz expects companies will jockey for position to avoid “double counting.”
“Their challenge is just in getting the data. Once we get it, we’ve got to figure out how to apportion it, how to assign it to different members of the value chain so we don’t have double-counting,” he said.
Scope 3 is an important component of the proposal even if it’s the most challenging, Henisz said. Without it, companies would be heavily incentivized to shift their pollution to other businesses along their supply chain, especially foreign or private firms not accountable to the SEC.
“You’re going to see this strategic positioning of assets away from the publicly traded companies, and that really goes against the spirit of disclosure,” he said. “So, it’s really important [for Scope 3] to stay in there, even though it’s hard to measure and hard to apportion.”
The proposal has a 60-day comment period and is already facing opposition from some political leaders and trade groups. In a statement, the U.S. Chamber of Commerce said that it was concerned about the “prescriptive approach” taken by the SEC and will advocate against provisions it thinks are too broad. U.S. Rep. Patrick McHenry of North Carolina, the ranking Republican on the House Financial Services Committee, said the proposal is “tone deaf and misguided.” And U.S. Sen. Joe Manchin, D-W.Va., said the proposal unfairly targets fossil fuel companies.
Henisz believes the new rules will make a difference and holds out hope that they will be enacted.
“Once you put the data out there, you’re under pressure to cut it,” he said. “Cutting those emissions comes at a cost, but it also comes at a benefit to the planet and the environment. I think we need to start grappling with what those trade-offs are.”