By Mark Gongloff / Bloomberg Opinion
For big companies, doing business without tracking climate risks is increasingly like steering a luxury liner through the North Atlantic without watching for icebergs. The work may be menial and tedious, but it could be the only thing preventing disaster.
You might not guess it amid all the noisy “anti-woke” backlash these days, but there is a movement afoot to force companies to report their carbon emissions more thoroughly. The goal is to give investors a better idea of the climate risks these companies face and, ultimately, to spur them to help curb the gases heating the planet.
California is leading the way as usual. It recently passed a law requiring both public and private companies with more than $1 billion in revenue and doing business in the state — about 5,000 in total — to report emissions up and down their value chain in what would be a far more comprehensive (and unflattering) accounting than most businesses bother with now. A companion bill would require businesses with more than $500 million in revenue to disclose their climate-related financial risks.
Gov. Gavin Newsom has until Oct. 14 to sign all this into law. He has said he plans to do so but may seek “some cleanup” of the language first. If and when Newsom signs off, this will send shock waves through corporate America, threatening “significant burdens in terms of compliance efforts and related expenses,” Fenwick & West lawyers wrote in the Harvard Law School Forum on Corporate Governance.
Also feeling the pressure will be the Securities and Exchange Commission, which is considering similar rules for public companies. It will soon face the choice between joining California — the world’s fifth-largest economy — in requiring extensive climate disclosures or leaving companies with an unhelpful, two-track regulatory regime.
Corporate advocates vigorously resist the new rules, complaining they will be onerous and costly. California’s finance department sided with them. And they may have a point: At the moment, the vast majority of companies mainly report what are called “Scope 1” and “Scope 2” emissions. Those encompass a company’s vehicles, buildings, electricity, heating and air conditioning. That’s pretty much it. California would force them to also report “Scope 3” emissions, which include:
• Purchased goods and services
• Capital goods
• Transportation
• Waste
• Business travel
• Employee commuting
• Leased assets
• Processing of sold products
• Use of sold products
• Disposal of sold products
• Franchises
• Investments.
So; kind of a lot. Reporting all of this will obviously be more complicated and costly than the status quo. And some Scope 3 emissions are tricky to measure accurately. If you’re a dishwasher manufacturer, say, how do you account for the emissions in the complete life cycle of every dishwasher you sell, each of which will be used somewhat differently (and often incorrectly) by every customer?
Layer climate-risk accounting on top of that, as California will do, and the workload becomes even heavier. SEC Chairman Gary Gensler, facing a barrage of thousands of comments, has suggested he might offer companies some leeway. The SEC’s rule is already much softer on Scope 3 reporting than California’s. And always looming is the U.S. Supreme Court, which you can easily imagine sympathizing with legal challenges from aggrieved companies.
But this hard accounting will almost certainly be unavoidable in the long run. Difficult as they are to measure, Scope 3 emissions account for 75 percent of a company’s total emissions, on average. That makes them the biggest source of corporate climate risk. Most companies around the world already report at least some Scope 3 emissions. The pressure for ever-greater disclosure, applied by investors and regulators globally, will only keep growing, noted a recent report from Cambridge University and the DLA Piper law firm.
A large and rising number of entities, including the European Union, Japan and the United Kingdom, mandate sustainability reporting standards suggested by the Task Force on Climate-Related Financial Disclosures, a working group created by the Group of 20’s Financial Stability Board and chaired by Bloomberg LP founder Michael Bloomberg. That group suggests full climate disclosure using the internationally recognized Greenhouse Gas Protocol, though it is still closer to the SEC than to California on Scope 3 requirements.
Failing to keep up with the times could lead to being shunned by environmentally conscious investors. It could disrupt business as the world transitions to cleaner energy. It could also expose companies to expensive litigation. As my Bloomberg Opinion colleague Lara Williams writes, activists are suing governments and companies over their failure to fight global warming, and they’re starting to earn some victories.
There’s a reason Apple Inc. and some other mega-companies took California’s side in pushing for disclosures. Such behavior might seem like an advanced form of greenwashing or the actions of the annoying kid who reminds the teacher to assign homework. But really, these companies can see the trends and know the easiest and safest course is for the world to adopt one predictable standard for climate reporting as soon as reasonably possible to reduce confusion and minimize costs in the long run. On the other course are those icebergs.
Mark Gongloff is a Bloomberg Opinion editor and columnist covering climate change. He previously worked for Fortune.com, the Huffington Post and the Wall Street Journal.
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