ESG In Pills - April 2024

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The Climate of Change: SEC's Enhanced Rules on Environmental Disclosures

The U.S. Securities and Exchange Commission (SEC) is a federal agency responsible for protecting investors, maintaining fair, orderly, and efficient markets, and facilitating capital formation. In March 2022, it proposed a new set of rules “to promote consistent, comparable, and reliable information”  of how public companies disclose climate-related risks. After an extensive review period, including over 16,000 public comments, the SEC finalized these rules on March 6, 2024.

Core Elements of the SEC's Ratified Regulations

The finalized rules have been softened in response to feedback received during the public comment period. Notably, the requirements for reporting Scope 3 emissions, which pertain to indirect greenhouse gas emissions from a company's value chain, have been removed. The disclosure now focuses on Scope 1 (direct emissions from controlled sources) and Scope 2 (indirect emissions from the generation of purchased energy) emissions. Compliance with the final rules will nonetheless require consideration of California's SB 253 , which does require disclosure of Scope 3 emissions for both public and private businesses. Ben Jealous, executive director of the Sierra Club, an environmental advocacy group, said the SEC’s rule was a positive step, but the omission of Scope 3 disclosures means it “falls significantly short of what’s needed.”

The SEC further narrowed down the disclosure requirements for Scope 1 and Scope 2 emissions by only mandating disclosure of material emissions. If a public company determines that a reasonable shareholder would not consider such disclosure important, then the company is not required to do so. The agency uses the U.S. Supreme Court’s definition of materiality, which held in the 1976 case TSC Industries v. Northway, Inc. that a fact is “material” if there is “a substantial likelihood that the ... fact would have been viewed by the reasonable investor as having significantly altered the ‘total mix’ of information made available.” Companies may be “incentivized to conclude Scope 1 and 2 emissions are not material,” said Allison Herren Lee, a former SEC acting chair and commissioner and an attorney at Kohn, Kohn & Colapinto. She added that companies may try to game their emissions to be lower than if they had to disclose their emissions across the supply chain.

Companies are required to disclose the influence of climate-related risks on their business strategies, operations, and financial conditions, including their mitigation and adaptation efforts, expenditures, and financial impacts. Moreover, companies must elucidate how climate-related events and conditions have materially influenced their financial statements, detailing associated costs, expenditures, and losses.

The rules will be phased in, with compliance dates varying by the type of filer. Large accelerated filers will face the earliest deadlines, starting with most disclosures by fiscal year 2025 and emissions reporting by fiscal year 2026. The timeline extends to smaller reporting companies, with the latest compliance dates set for fiscal year 2027.

Non-compliance could lead to SEC enforcement actions, shareholder lawsuits, and reputational damage. The softening of the rules does not eliminate these risks, as the demand for climate-related information among investors and other stakeholders continues to grow.

The SEC estimates 7,000 domestic companies will be required to report climate-related disclosures under the rule, as well as 900 foreign private issuers, according to an agency spokesperson. However, among those the agency estimated, around 40% of that domestic estimate and 60% of estimated foreign entities are large accelerated filers or accelerated filers. That smaller subset of companies in each group will then have to do a materiality assessment to determine whether its scope 1 and scope 2 emissions are deemed material to investors, the agency said.

Legal Challenges and the Path Forward

The regulations’ suspension, right after March 6, arises amidst lawsuits brought by nearly every Republican-led state and fossil fuel interests have been consolidated at the 8th Circuit, a conservative-dominated federal appeals court in Missouri. These parties contest the disclosure requirements as overly burdensome and challenge the SEC's authority. Conversely, eighteen Democratic-led states and the District of Columbia have defended the disclosure rule, emphasizing the necessity for investors to access reliable information on climate risks. “Investors need reliable, comparable information about risks that registered companies face and how they are managing those risks,” says the brief led by the Massachusetts and District of Columbia attorneys general. “Climate-related impacts are undeniably one such category of risk.”

Notwithstanding the SEC’s current stance, companies operating within California and Europe are expected to persist in their climate disclosure efforts. California’s rule is expected to impact more than 5,300 companies – public and private – by 2027. The EU’s Corporate Sustainability Reporting Directive mandates Scope 3 reporting and double materiality to around 3,000 US companies with EU subsidiaries.

The final SEC rule comes as climate impacts are wreaking havoc across the US and the world. Last year the US experienced a record 28 disasters that each caused at least $1 billion in damages , according to the National Centers for Environmental Information. The SEC said it would continue “vigorously defending” the validity of its climate rule and believes that it had acted within its authority to require disclosures important to investors. A stay would “allow the court of appeals to focus on deciding the merits,” the SEC said in a statement.

SEC press release here .

Image of the Month

BBC News  tracking A23a - the world's biggest iceberg as is drifts towards oblivion.

Environment

SBTi Tightens Climate Commitment Oversight

The Science Based Targets initiative (SBTi) has been enabling companies to set science-based emissions reduction targets, aligned to the Paris Agreement goals. The corporate climate action organization is intensifying its approach to enforce climate accountability by publicly listing companies that fail to meet approved climate targets within two years of their initial commitment, branding them as ‘commitment removed’ on its dashboard. This measure came into effect last August, enhancing transparency and urging businesses to act swiftly on their climate pledges. This week, notable companies including Yum Brands, owner of globally recognized food chains like Pizza Hut, KFC, and Taco Bell; Osborne Infrastructure, a UK-based firm; and JBS, the world's largest meat producer particularly its association with Amazon deforestation, have seen their commitments removed. The action against JBS follows significant opposition from environmental groups and US lawmakers, which has also postponed its New York Stock Exchange listing. Entering 2024, the SBTi is progressing with reforms to bolster its verification process for corporate climate commitments, aiming to separate its standard-setting and target validation services. This move comes as the initiative witnesses a doubling in corporate commitments from 2022 to 2023, signalling growing corporate engagement yet highlighting the need for stringent validation to ensure these commitments translate into real-world impact.

Read more here .

Australia's Economic Crossroads

Unveiled as the country's inaugural National Climate Risk Assessment, the latest report from the Australian government shows the multifaceted dangers climate change poses to its communities and economic stability. The findings spotlight the jeopardy of water security, agricultural sustainability, and economic resilience due to climate change. Highlighting a grave scenario where financial institutions might retreat from regions highly susceptible to climate calamities, the assessment warns of potential nationwide reverberations. This retreat could destabilize local economies, strain social and health support systems, and jeopardize food production. For example, the Australian reef – highly vulnerable to higher temperatures – contributes about A$6 billion ($4 billion) to the economy and supports 64,000 jobs. The backdrop of soaring insurance costs, driven by recurrent natural catastrophes, underscores the urgency. The assessment showed, in fact, that pressures on Australia’s financial system from a surge in climate-related disaster claims could lead to a “plausible worst-case scenario” whereby insurers and lenders pull out of highly exposed communities. The report also flags global threats to Australia, including increased migration and trade disruptions, urging a strategic adaptation plan to confront these imminent risks.

Read more here .

Navigating Corporate Environmental Accountability

In a revealing analysis by CDP on corporate environmental impacts in 2023, it emerges that a vast majority of companies may be underplaying the risks and consequences of their operations on the environment, with a mere 140 out of over 23,200 disclosing fully on all adverse impact metrics. This scrutiny, pivotal for understanding corporate footprints on ecosystems, brings Principal Adverse Impacts (PAIs)—encompassing greenhouse gas emissions, energy use, water pollution, and impacts on biodiversity—into sharp focus. PAIs not only reflect a company's direct and indirect environmental repercussions but are also central to compliance with evolving global sustainability frameworks, like the European Sustainability Reporting Standards and the Sustainable Finance Disclosure Regulation. These standards, geared towards enhancing transparency and accountability, underscore the pressing need for corporations to rigorously assess and report their environmental impacts. With only a fraction setting ambitious mid-term targets, particularly in high-emission sectors, the analysis underscores a pressing disparity in corporate environmental stewardship. Despite a 4.3% decrease in Scope 1 GHG emissions since 2019, the most emitting sectors have shown minimal reductions. The analysis also highlights a 74% increase in renewable energy consumption since 2019, yet concerns over water sourcing from stressed areas and the neglect of biodiversity-sensitive areas persist.  CDP's findings stress the need for companies to adopt science-based targets and comprehensive reporting, financial institutions to demand better data disclosure, and policymakers to enforce robust reporting standards.

Read more here . 

Social

Landfills Leak More Methane Than Thought

Recent research by Carbon Mapper, highlighted in Science, reveals that methane emissions from U.S. landfills are at least 40% higher than previously estimated by the Environmental Protection Agency. This study, the most comprehensive of its kind and published after COP28's nations pledge to reduce methane emissions , found that a significant majority of these emissions stem from persistent leaks at landfill sites. Addressing these methane hotspots, which constitute nearly 90% of the landfill methane measured, presents a critical opportunity for reducing harmful greenhouse gas emissions. This effort is not only crucial for the environment but also for protecting communities disproportionately affected by landfill gas exposure. Unfortunately, globally, methane emissions are not coming down. The potent greenhouse gas was emitted from fossil fuels  at almost a record high level last year, the International Energy Agency said.

Read more here .

AI Oversight Alert

A Microsoft software engineer has escalated concerns regarding the potential for the company's AI tool, Copilot Designer, to generate harmful and abusive imagery. Jones said he discovered a security vulnerability in OpenAI’s latest DALL-E cutting-edge image generator model that allowed him to bypass guardrails that prevent the tool from creating harmful images. His findings, reported to Microsoft and detailed in letters to the board, lawmakers, and the FTC, emphasize the disconnect between the tool’s marketing as child-friendly and the internal acknowledgment of its ability to produce inappropriate material across various contentious subjects. This development underscores growing apprehension around AI's capability to generate disturbing content, amplifying the debate on the need for stringent safeguards and transparent consumer warnings in AI technologies. Microsoft had already said it was investigating reports that its Copilot chatbot was generating responses users called disturbing, including mixed messages on suicide. And in February, Alphabet Inc.’s flagship AI product, Gemini took heat for generating historically inaccurate scenes when prompted to create images of people.

Read more here . 

The Looming Heat Crisis

A recent Global Witness report unveils a stark warning: emissions from leading oil giants like Shell, BP, and ExxonMobil could spell millions of heat-related fatalities by 2100, urging a rapid shift away from fossil fuels. Leveraging Columbia University's mortality model, the study forecasts 11.5 million deaths from the projected 51 billion tonnes of CO2 these corporations will emit by 2050, under a high emissions scenario. This dire prediction underscores the deadly stakes of continued oil exploration and the critical need for global efforts towards net-zero emissions to halve the potential death toll.  In Europe, searing heat killed more than 60,000 people in 2022  and heat-related deaths rose by 95% in the US between 2010 and 2022. The big oil corporations continue to invest billions in new oil and gas reserves and BP  and Shell  have recently weakened their climate pledges. Amidst escalating global heatwaves and their disproportionate impact on vulnerable populations, the call for protective labour policies and a balanced energy transition becomes ever more urgent, challenging oil majors and governments alike to reconcile energy demands with the imperative to mitigate climate catastrophe.

Read more here .

Governance

CEO Crime in New Accountability Directive

The European Parliament has approved an amendment to the Environmental Crime Directive, marking a significant advancement in the fight against large-scale environmental harm. With a vote count of 499 in favour, the directive now encompasses a broader array of environmental offenses, including illegal timber trade and pollution from ships, aiming to intensify the consequences for significant environmental damage. Key features of the directive include up to ten years of imprisonment for CEOs and company representatives found intentionally contributing to ecosystem destruction, as well as fines up to 5% of a company's annual global turnover or €40 million. The directive, which also seeks to bolster preventive measures and encourage the restoration of damaged environments, must be integrated into national laws by EU countries within two years, a process already underway in Belgium. This move represents a pivotal shift towards holding corporations and their leaders accountable for environmental crimes, amidst rising pushback on the parallel nature restoration legislation , aimed at repairing extensive damage to its land and water ecosystems, due to withdrawal of support from several member states such as Hungary and Italy.

Read more here . 

Unilever's Bold Stance

In a significant move, Unilever has announced its readiness to sever ties with any trade associations that fail to support the Paris Agreement. The rigorous evaluation of its affiliations signals a strong stance within the private sector by the multinational, advocating for climate policies, carbon pricing, renewable energy acceleration, nature protection, and improved carbon accounting within supply chains. Unilever already quietly quit the world’s biggest business trade group, the U.S. Chamber of Commerce, years ago over its historical hostility toward environmental policies, according to a 2017 investigation by The Guardian . This stance is relatively rare: a majority of companies touting net-zero targets don’t support those pledges with climate policy advocacy, either directly or through trade groups, according to November research by InfluenceMap . Unilever's decision, emerging from a comprehensive review of its trade group memberships, not only highlights its commitment to environmental sustainability but also sets a precedent for how companies can leverage their influence to foster positive policy changes. “We want our associations to be catalysts for positive policy change, and if they can’t, then we reserve the right to withdraw our membership fees.” Said CSO Rebecca Marmot. Through this approach, it aims to encourage other companies to adopt more aggressive climate strategies, potentially transforming how the private sector engages with and influences global climate governance.

Read more here .

Action in the Wake of Global Biodiversity Targets

The upcoming UN Biodiversity Conference (Cop16) in Cali, spearheaded by Susana Muhamad, Colombia’s Environment Minister, underlines a significant pivot towards integrating biodiversity with climate strategies. COP16 in fact aims to build momentum towards the climate conference in Brazil (COP30) in 2025 drawing connections between the two forums. The summit, supported by Colombia’s commitment to environmental leadership, including backing a fossil fuel non-proliferation treaty, emphasizes the urgent need for collaborative efforts across all sectors to meet this decade’s biodiversity targets, and sets a concrete agenda for the private sector. Governments will have to present actionable national plans that align with the ambitious biodiversity targets agreed in the Kunming-Montreal Global Biodiversity Framework (GBF) the previous year, such as safeguarding 30% of terrestrial and marine habitats and revitalizing degraded ecosystems. “We need to create the momentum and the role of Cop16 is to make nature a pillar of those discussions,” Muhamad said. “I think sometimes we divide the international environmental agenda into many issues … [but] we need to concentrate. For example, saving the Amazon is a practical and tangible action. The creation of multinational marine protected areas is a tangible action that has results for the climate and biodiversity.” For the private sector, this represents a call to action to adopt and support sustainable practices that contribute to the GBF, urging boards and leadership to integrate biodiversity targets into their strategic planning. By integrating biodiversity targets into their business models and decision-making processes, companies can contribute to global conservation goals while anticipating and mitigating the risks associated with biodiversity loss and climate change.

Read more here . 

Events

US Climate Action Summit

The Climate Group,

April 22-25,

Washinghton, DC

Sustainability and Resonsible Investment

Investment Association,

April 24,

London

Sustainabile Investment Forum Europe

Climate Action/UNEP FI,

May 2,

Paris

Sustainable1 Summit 2024

S&P Global

May 8

London, UK

Spring Conference

UKSIF

May 15

Edinburgh

Responsible Investor Japan 2024

PEI Group

May 22-23

Tokyo, Japan

Sustainable1 Summit 2024

S&P Global

June 6

Tokyo, Japan

Responsible Business Europe

Reuters Events

June 11-12

London, UK

GreenFin 24

GreenBiz June 17-19

NYC, USA

April 2024, issue n27. Previous editions can be found on LinkedIn or the Oxford Business Review website . All information in this article is personal and does not represent the viewpoint of any company.