This week, I want to address a material development announced on Monday. The SEC released a 500-page proposal to require climate disclosures from all publicly listed companies in the US based on existing frameworks and standards, including TCFD.
Voluntary efforts to report environmental information have risen dramatically in the last decade (from ~4k to +13k companies reporting under CDP, Bloomberg Green). Having said that, as recent reports from the IPCC have made clear, what we are doing today as a society is not enough, and investors that are trying to integrate climate exposures to their investment processes need homogeneous disclosure. This is what truly drives the SEC’s proposal.
What it looks like
In line with what most companies that report climate data do, the requirement is that emissions data is reported on three levels, better known as scopes, annually. The first two refer to direct impacts from operations, including resource use and transportation methods. The third broadens the coverage to supply chain impacts, business travel, and even assets leased by the company. The SEC plan to make Scope 3 disclosures a requirement depending on how material they are to a company’s business.
- Publicly traded companies are responsible for 40% of all emissions. A 13% decrease is required to meet international limits. Yet in 2021, Global CO2 emissions rebounded to their highest level in history, surpassing 2 billion tons.
- Mandatory ESG disclosures are becoming more common: at least 25 countries already have these, including much of Europe, Canada, Australia, and India. The U.K. will start requiring corporate climate risk reports next month, as will Switzerland in 2024.
- Standardized rules on climate disclosure will be beneficial to both investors and companies. Companies will have adequate guidance on what to report. Investors will have consistent and comparable data across the board.
Although this may seem far away for Mexican companies, it is important to understand that these rules would also apply to anyone with a dual listing in the US, regardless of the business’s nationality. It is also likely that investors, used to homogeneous data in the US (which is a massive market), will want similar data from other places where they invest (and companies would be compelled to comply with their wishes if they want their investments).
The proposal is still far from being a reality. There has been pushback from some trade groups, people are questioning the SEC’s jurisdiction on this topic, plus there is still some discussion around some standards and terminology. However, it seems likely that some version of this will eventually materialize, and it seems smart for companies to prepare in advance as climate disclosure is not trivial nor fast.
I hope you found this interesting. As usual, if there is anything we can help you with, or if there is an ESG topic you would like to know more about, please let us know.
CEO, Miranda ESG
Contacts at Miranda Partners