Bonus content: The SEC punts
Some thoughts on the SEC's unfortunate miss on GHG emissions reporting, and a defense of compliance--you can't manage what you don't measure.
The SEC punts
Here was my initial response to the SEC’s new rules around companies disclosing their greenhouse gas emissions—rules that were almost universally described as “weakened” and “watered down.”
In a nutshell, the rules do not require publicly traded companies to disclose what is known as Scope 3 emissions—these are indirect emissions in 15 categories that come as a result of doing business, investments, buying goods and services from other companies, or transporting products to and from consumers. So, a pretty big source of emissions, as you can imagine—the vast majority, in many cases. This Wall Street Journal article points out that 90% of Coca-Cola’s emissions are Scope 3, because they’re the result of packaging and transporting products.
The rules also say that companies only have to disclose emissions that are considered material to their financial performance, making them effectively voluntary.
Some reporting suggested the SEC had tried to craft a regulatory framework that might not immediately get them sued by Republican-led states (which had already vowed to sue no matter what the requirements ended up being)—or a framework that would at least survive the lawsuit that was filed almost simultaneously with the SEC’s announcement. Time will tell on that, at least.
Either way, as I mentioned in my Threads post, the SEC had room to punt because so many other countries (and California) are already requiring Scope 3 and other GHG disclosures as the cost of doing business there. It’s still disappointing that the SEC wouldn’t take a stronger hand, especially since the agency would be sued no matter what, but this horse has almost certainly left the barn, and disclosures and compliance will be par for the course of any company.
And on that note, I’ve been hearing a lot more pushback, even from some high-profile Chief Sustainability Officers, about spending time and money on regulatory compliance. Every dollar spent on compliance, I have heard, is a dollar not spent on decarbonizing our operations.
At face value, this makes some sense. I was briefly swayed by this argument myself, as someone who doesn’t really like paperwork.
But the fact is, compliance cleans things up, and that is to the benefit of companies’ bottom lines, investors, the public, and in this case, the planet. Sure, it’s probably burdensome now, in the short term, to have to comply with reporting requirements that aren’t standardized, and when there isn’t a universal methodology for cataloging Scope 3 emissions.
But I’m wary of a company that doesn’t want to do the accounting. First of all, self-reporting and voluntary compliance don’t usually end up working out well for end users (see: data use and privacy, as but one example). When companies must account for their emissions or data collection or any other business practice, the resulting transparency almost always forces change for the better, if only as a result of pressure from shareholders, customers, and investors. Whatever you’re hiding, you can get away with forever. This is pretty basic logic.
If you’re telling me that every dollar spent on compliance is a dollar not spent on decarbonizing your operations, I feel like you’re not that committed to decarbonizing your operations. That’s a choice, and I believe it to be a false one.
Second, not doing the accounting is bad for business. Companies that pay attention to their carbon emissions are likely to find more efficient ways of doing business that can save them money, get them access to green financing or other tax incentives, or open them up to investment from institutions that prioritize net zero goals. Plus, they can avoid penalties by doing business badly in states or countries that require accurate accounting.
Third, if you’re telling me that every dollar spent on compliance is a dollar not spent on decarbonizing your operations, I feel like you’re not that committed to decarbonizing your operations. That’s a choice, and I believe it to be a false one.
I recently had a conversation with someone in the banking industry and he gave me a useful way to think about this: when the Sarbanes-Oxley Act was passed in 2002, financial institutions had a collective fit about the burden of compliance and about having to do more work just because Enron and WorldCom had screwed it up for everyone. But within just a few years, it became clear that doing the work of cleaning up the books was in companies’ best interests in all kinds of ways, not least of which was identifying inefficiencies and poor business practices that were costing them money, resources, and time.
These days, SOX is still driving the financial industry crazy, but it’s also widely credited with restoring trust in that same industry, reducing damaging scandals, improving corporate responsibility and ethics generally, and reducing risks for companies that have their compliance house in order.
We should start thinking of GHG reporting in the same way. Is it annoying and expensive? Probably. Will it lead to better outcomes across the board, including, crucially, actually reducing emissions? Unquestionably. I’m disappointed that the SEC backed down, but emissions reporting is here to stay regardless, and I wouldn’t trust any companies that are trying to dodge it.