Many big U.S. companies have been fighting in Washington to block rules requiring them to disclose their greenhouse-gas emissions. They picked the wrong fight.
California and the European Union are both poised to approve rules that require companies that do business there to disclose their emissions. The rules would apply to private as well as public companies and require businesses to calculate and disclose emissions from their suppliers and customers, which goes beyond what was expected out of Washington.
The size of the two economies—if California was a country it would have the world’s sixth largest economy and the EU as a bloc ranks third—means that few large companies can duck their rules.
“In one shape or another, these disclosure requirements are coming,” said Sara Mahaffy, ESG strategist at RBC Capital Markets LLC.
The rules will be among the biggest changes in corporate disclosures in decades. They add climate information to the financial data that companies need to produce, making clear how businesses stack up against one another and whether they are reducing emissions in line with their commitments.
Businesses and Republicans have pushed back against an effort by the Securities and Exchange Commission to require disclosures of emissions and climate risks for public companies. It isn’t clear whether the SEC will require companies to report emissions from their suppliers and customers.
California Gov. Gavin Newsom has said he plans to sign a bill with his state’s rules into law in coming days. The rules in Europe are currently under review by the European Parliament and the national governments. They are expected to be approved in the coming months.
California also passed a bill that would require companies to disclose climate-related risks. The rules will take effect over the next several years. The California rules could be challenged in court or by a referendum that opponents could put before voters, a move that gig work employers and fast-food companies have tried in recent years.
Business groups fought against California’s emissions disclosure bill before it passed the legislature last week, though some large corporations such as
Apple and Salesforce said they support it. It would apply to any business, public or private, that does business in the state and has more than $1 billion in revenue.
Newsom, a Democrat, said at a Climate Week event Sunday he would sign both bills, though he may request some changes when the legislature reconvenes in January. Democratic State Sen. Scott Wiener, the bill’s author, said it isn’t clear what specific changes Newsom is seeking but that it is unlikely the legislature would agree to remove Scope 3 disclosures from the requirements.
Investors will use the information to compare businesses, track the companies’ progress in reducing emissions and identify companies that are particularly vulnerable to—or prepared for—risks related to climate change. These may include physical threats to their operations from events like hurricanes and wildfires, or business that could be left behind by society’s transition away from fossil fuels.
Climate activists are betting that the disclosures will enable them to pressure heavy polluters to clean up their operations and raise the cost of capital for firms that don’t.
“There is a clear, worldwide, growing regulatory momentum for consistent information,” said Steven Rothstein, managing director for nonprofit Ceres’ Accelerator for Sustainable Capital Markets. “Investors, companies, clients, employees, customers are all saying they don’t want to be blindfolded.”
For companies—particularly private firms that don’t currently disclose much, if any, information about their businesses—the rules imply a significant increase in data-gathering, processing and reporting. Republican SEC Commissioner Hester Peirce, in dissenting from the agency’s proposed climate rule last year, said they would “eventually rival our existing securities disclosure framework in magnitude and cost and probably outpace it in complexity.”
Some industry groups in the U.S.—including the Farm Bureau, National Association of Manufacturers and U.S. Chamber of Commerce—have pushed back. In comment letters responding to the SEC’s proposed rules, they have hinted at possible legal challenges by arguing the requirements’ costs outweigh their benefits and that the agency lacks the statutory authority to implement them.
The big change for companies, and the shift that industry groups have fought against, is disclosure of so-called Scope 3 emissions, which are produced by suppliers and customers. Scope 1 emissions are produced by a company’s own operations and Scope 2 emissions come from the energy a company uses.
These emissions often constitute the vast majority of a company’s carbon footprint. For oil companies, for example, most of their emissions occur when consumers burn their fuel. For clothing makers, emissions occur in their supply chains.
Tracking Scope 3 emissions allows a more complete view of a company’s reliance on fossil fuels. Apple has very low Scope 1 and 2 emissions because it outsources most of its manufacturing. By those measures, the emissions intensity of
Samsung, which does its own manufacturing, including some for Apple, would be 200 times higher than Apple’s, one paper observed.
Critics say Scope 3 data is hard to reliably measure and costly to produce. Such arguments have resonated in Washington, where many Republicans remain skeptical of either climate change or government efforts to address it. The SEC floated its proposal 18 months ago and has yet to finalize it, frustrating environmentalists.
A new industry of data suppliers, ranging from Big Four accounting firms to startups, promises to supply Scope 3 data to companies. Most Scope 3 rules give companies leeway to make estimates by using data for the typical emissions of producing, for example, a shirt.
The new rules come at a time when governments are providing billions of dollars of incentives for companies to cut their carbon emissions. Private investors, seeing the chance to profit from the shift, are also willing to spend money to reduce emissions.
The California and European rules might make it easier for the SEC to issue its climate rules. Companies, resigned to the fact they will have to disclose this information, now are seeking consistency among regulators to limit the cost of complying.
“Most of the companies which the SEC regulates are going to be subject to the California disclosure rule,” said Clara Vondrich, a senior policy counsel for the climate program at Public Citizen, a liberal advocacy group. “The cost of what these companies are going to have to do for the SEC is going to be greatly reduced.”