Many companies provide information on climate risks when disclosing material information, but investors frequently struggle to make comparisons. The Securities and Exchange Commission attempted to address this on Monday by requiring companies to report greenhouse-gas emissions from their own operations as well as energy consumption, and to obtain independent certification of their estimates. The proposal will be open for public comment for at least 60 days before the SEC begins drafting a final rule.
Companies such as Acco Brands Corp., laboratory supply firm Agilent Technologies Inc., and freight broker C.H. Robinson Worldwide Inc. have stated that they are preparing for potential climate change disclosure changes.
Acco Brands, based in Lake Zurich, Illinois, expects the potential additional disclosure to raise its costs, but not by as much as the roughly $3 million it pays annually to comply with internal controls requirements under the Sarbanes-Oxley Act of 2002, according to Chief Financial Officer Neal Fenwick. "The bottom line is that we're going to have to invest a lot of time, effort, and money," Mr. Fenwick said. "It's also something investors want, and because it's the SEC, we'll have to do it."
According to Mr. Fenwick, the proposal would compel the company to provide more information about its carbon emissions, which would entail a better understanding of where its electricity providers source their power. According to Mr. Fenwick, this information is not readily available in some countries.
According to Julie Mediamolle, a partner at law firm Alston & Bird LLP who focuses on corporate governance and securities compliance, companies will likely need to hire more people to assist with the work and hire an engineering or audit firm to attest to the accuracy of their estimates.
Companies would be required to include independent assurance—typically from a consulting or audit firm—that the emissions details from their own operations as well as from electricity, steam, heating, or cooling are accurate under the proposal.
According to Agilent's CFO, Robert McMahon, the assurance requirement adds a layer of complexity and expense that appears unnecessary. "Companies will do the right thing on data quality if that data is in their [annual filings]," he says. Agilent stated that it expects compliance costs to rise as a result of the proposal, and that it will evaluate the potential costs as part of a broader review.
Under the proposal, companies must disclose Scope 3 emissions, which includes those from suppliers, only if they deem the output of greenhouse gases significant to investors or if they outline specific targets for them. Scope 3 emissions from companies’ supply chain are particularly hard to measure.
For large firms that meet the above criteria, disclosure of Scope 3 emissions would be required in SEC filings beginning in 2025. Exempt would be small public companies with less than $250 million in publicly traded shares. Companies that would be required to disclose Scope 3 details wouldn’t be held liable for the estimates if they were provided in good faith.
The Eden Prairie, Minnesota-based company C.H. Robinson intends to closely monitor what the SEC eventually requires on Scope 3 emissions, which it has found difficult and complex to measure, according to CFO Mike Zechmeister. He believes that companies should not be held liable for their Scope 3 estimates until measurement and reporting on these emissions become less difficult. According to Mr. Zechmeister, the company expects its compliance costs to rise but not significantly because its reporting aligns with the proposal.
"If the rule requires Scope 3 measurement, we believe many companies will need to turn to sophisticated freight management suppliers like us to comply," he said.
According to Rachel Glaser, CFO at Etsy Inc., the proposal is a step toward developing unified and organized policies and guidance for corporate climate disclosures. In recent years, the Brooklyn, New York-based online marketplace has voluntarily disclosed three sets of emissions.
Higher compliance costs could result in new revenue opportunities for audit and consulting firms, but the proposal would also introduce new challenges. In the short term, auditors and companies must understand the gaps in their reporting requirements, according to Maura Hodge, an audit partner at KPMG US LLP.
"This is an opportunity for auditors...to provide high-quality, credible information on which stakeholders can make decisions," said Wes Bricker, vice chair at PricewaterhouseCoopers LLP and a former SEC chief accountant.
Investors have generally expressed support for the proposal. According to Jeff Mahoney, general counsel at the Council of Institutional Investors, which represents pension funds and other large money managers, the proposed requirements would improve shareholders' ability to make more informed investment and proxy voting decisions. "Inadequacies in existing disclosures by companies about climate change risk can lead to asset mispricing and misallocation of investment capital," he said.
Sandy Peters, senior head of financial reporting advocacy at the CFA Institute, which represents investment professionals, agreed, saying that requiring companies to focus on measuring and disclosing specific types of emissions is an important step toward providing better information to investors. "You have to start somewhere," Ms. Peters explained.