SEC and ESG - March 27, 2022

The life of a regulator must go on, despite an increasingly uncertain world. 

There are some truths that are a bit inconvenient. Certainly E=mc2 has opened up a Pandora’s Box of unintended consequences. Alfred Nobel paid repentance for his invention of dynamite, and its coopting into munitions, by sponsoring the Nobel Prize for those who are determined to use their ingenuity for good. And while the oil fields of Pennsylvania and Texas freed us from the drudgery of nighttime, and then of the horse and buggy, we today pay the price in global warming. 

Al Gore spoke of the inconvenient truth that our reliance on fossil fuels has placed us in a trajectory of global warming. That path worsened as dramatically over the last half century, at precisely the time that our planet was finally realizing its global warming effects. 

The notion of greenhouse gasses goes back much farther than that, though. Early in the 20th Century scientists realized that atmospheric carbon dioxide acts as a blanket that permits visible and ultraviolet light to penetrate the atmosphere, but infrared light reradiated from a warmed Earth would be reflected back. 

Precisely 50 years ago, John Sawyer made the first bold claim:

The increase of 25% CO2 expected by the end of the century therefore corresponds to an increase of 0.6 °C in the world temperature – an amount somewhat greater than the climatic variation of recent centuries.

Global warming had become a recognized phenomenon. 

I realize acceptance of this inconvenient truth make some uncomfortable. Others argue that they recognize the fact, but they shrug their shoulders and would rather not squarely address how each of us are complicit in global warming. Very few of us acknowledge our carbon footprint or wish to measure it. 

Yet, acceptance is the first step in addressing the problem. 

In addition, our young people and those who are willing to accept our responsibility for the contribution to global warming each of us make truly want to know who cares and who does not. This is a big part of the E in ESG, the awareness in Environmental, Social, and Governance factors that contribute to a healthy planet. 

Some enlightened corporations acknowledge and accept the theory that we can’t manage something if we do not measure it. 

For those publicly traded corporations, ESG awareness translates into appreciation by members of the public concerned about the health of the planet. 

Now, the Securities and Exchange Commission agrees. 

This week they stated that they are preparing a requirement for publicly traded companies to begin reporting their carbon footprint. 

Their logic is that climate risks are material for many companies. These may include ice storms and hurricanes, flooding, and forest fires. Each of these can impinge on the profits of publicly traded corporations, and their investors need to know to what degree the companies they purchase have plans to mitigate these risks. 

The second risk is in the effectiveness corporations can transition, should there be tighter mandates for an economy that is less carbon intensive. This might be considered the risk of keeping one’s head in the ground. 

Companies that state their awareness of vulnerability to climate change must also disclose their targets. This also requires a disclosure of their carbon footprints, which include the direct emissions a corporation makes, and the indirect emission related to the energy used by a corporation. 

Finally, some firms may even need to report the emissions that occur in their supply chain that brings factors of production to them, or the greenhouse gasses emitted by their employees who commute to work or who travel for work. 

These regulations remain at the proposal stage. The calculations involved will be a mere fraction of the auditing costs mandatory for all publicly traded companies and reported to the SEC annually in their 10-K filings and quarterly 10-Q filings. 

Yet, certainly, some organizations will fight these provisions kicking and screaming, others will comply only because they must, and some will embrace such reporting because each of us has a responsibility for stewardship of the planet, both individually and at the corporate level. 

But, some investors, especially, want to know these risks and footprints, and want such information just as they want to see the other corporate bottom lines. This reporting is no less unreasonable from the perspective of many as profits, losses, risks, and evolving market conditions.