LongView is excited to join efforts advocating for the adoption of a new climate disclosure rule proposed by the Securities and Exchange Commission in March. This week we added our name to a letter of support that has already been signed by hundreds of investment professionals representing over $3.2 trillion in assets.
Why is the SEC proposing the new disclosure rule?
According to the Intergovernmental Panel on Climate Change, humanity must reduce its greenhouse gas emissions to net-zero by 2050 to keep the planet from warming more than 1.5 degrees and to avoid the most catastrophic impacts of global warming.
As the top financial regulator in the US, the SEC is responsible for protecting investors from unnecessary risks by requiring companies to disclose information on a broad range of topics.
Signaling a shift by regulators to begin managing climate risk in the U.S. financial system, and in the face of mounting evidence that a warming planet is having a measurable impact on businesses' bottom line, the oversight agency has concluded that climate change represents a serious hazard to the global economy, and to investors who provide the economy with capital.
The proposed SEC rule would require all public companies in the US to disclose financial information about the risks they face from climate change. It also requires them to report on the environmental impacts of their businesses, and on their plans to address climate risks.
Why is this important?
For too long, most companies in the US have kept investors in the dark about their carbon footprint and about the risks they face as a result of climate change.
The increasing frequency and severity of extreme weather events raise the likelihood of inconsistent crop yields, infrastructure damage, and disruption to supply chains. These and other climate-related risks such as rising sea levels and loss of biodiversity impact all companies and all investors regardless of their ESG preferences. For companies that are unprepared, the risks could also include being left behind in the transition to a net-zero economy as early adopters of sustainable practices gain market share and regulators crack down on climate offenders.
For investors who care about environmental, social, and governance issues, a universally accepted standard for reporting greenhouse gas emissions and transition plans is necessary to determine which companies to invest in, which to exclude, and where to engage in shareholder advocacy.
How does this affect our clients?
At LongView we use a variety of ESG strategies in our clients’ portfolios. We believe the proposed climate disclosure rule will help us gain a more accurate understanding of the risks and opportunities associated with the funds we invest in.
The devil in the details
The SEC’s proposed rule would require third-party verification and provide standardized guidelines for reporting scope 1, 2, and 3 greenhouse gas emissions. While these terms may seem arcane, we’ll be hearing a lot more about them in years to come, and we think it’s worth taking a moment to explain them.
For companies to reduce their fossil fuel use and emissions, they must first calculate their carbon footprint and then set reduction targets. As currently defined by the most widely-used international accounting tool, the Greenhouse Gas Protocol, greenhouse gas emissions fall into three categories, or ‘Scopes’.
- Scope 1 are direct emissions produced by a company's buildings, vehicles and equipment.
- Scope 2 are indirect emissions produced through generating the energy that a company buys to make its product or service (e.g. electricity, heat, steam).
- Scope 3 are all other emissions associated with a company’s activities. These include supply chain-related emissions from the transportation and distribution of a company’s product, emissions created by suppliers of goods and services to the company, as well as business travel, employee commuting, waste disposal, leased assets, emissions from the use of the company’s product, and the product’s end of life (when it is no longer useful).
Corporations generate more than two-thirds of the planet’s emissions, and more than 90% of these emissions are produced in the supply chain. Yet barely a third of companies currently report on scope 1 and 2 emissions, and only 15 % report on emissions in scope 3.
Most companies will have to make significant changes to their business models to meet the goal of Net-Zero. But while this will come at a cost, it will also open many opportunities for those that are positioned to take advantage of the transition.
The proposed SEC rule will be a big step forward in achieving transparency and accountability for US corporations, helping investors choose where to put their money, and transitioning the economy to sustainability before the worst effects of climate change become unavoidable.
If approved, the rule will take effect in December of this year and companies will begin reporting in 2024.
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