SEC Climate Rules: Winners and Losers-Reuters

The US Securities and Exchange Commission seal hangs on the wall of Washington’s SEC headquarters.

Jonathan Ernest | Reuters

On Monday, the Securities and Exchange Commission announced a new draft rule requiring companies to disclose climate change risks and greenhouse gas emissions. It will take some time for the proposal to be enacted, but once it is enacted, its impact will be widespread.

Normalization of climate disclosure creates a unique industry of professional and technical solutions for tracking, validating and reporting these risks. Companies that already voluntarily track and disclose emission data may have an advantage over their peers.

The SEC’s climate rules also increase transparency for investors, customers and other stakeholders to build cleaner, data-driven cases of alternatives. Climate change delays can lose money as customers and investors shift their money to more environmentally friendly options.

Winner: A company that manages carbon emissions

Companies that use clean energy and have relatively low carbon emissions will benefit from the SEC’s climate rules, while carbon-intensive companies will “lose over time.” Claire Healy, director of the Washington, DC office of the independent climate change think tank E3G, told CNBC.

Clear emission data provides shareholders, customers and other stakeholders with a strong barrier to pushing companies irresponsible for emissions and other climate impacts, Georgetown Finance Professor, Lina Agawal said.

Aggarwal has a historical precedent in CNBC with clear information that allows investors to sell from companies that do not meet certain ethical standards.

For example, student protests have led universities to withdraw their funds from investing in fossil fuels. In addition, sovereign wealth funds and pension funds such as CalPERS in California have stripped tobacco stock.

“They may have been hit by short-term returns, but in the long run they are reducing risk by doing this,” Aggarwal said.

But that doesn’t mean that SEC weather data will be the only part of a company’s sustainability story.

“The rules proposed by the SEC are another quiver designed to change investor calculations and lead to faster decarbonization,” Healy told CNBC. “It’s clearly other factors that influence final investment decisions, such as government policy tightening, explicit / implicit carbon pricing, asset tie-up risk, shareholder pressure, social management of licenses, staff retention, etc. Combined with »».

Loser: Companies with surprisingly poor carbon dioxide emissions

Companies with surprisingly high carbon emissions can be really at a disadvantage when the new rules come into force.

“I think these businesses suffer in two ways,” Aggarwal said. “Cost of capital goes up and their income goes down. Therefore, it is both the commodity and financial markets that affect these companies. »»

“I think the trend has already begun, but now as transparency becomes more pronounced, it’s easier for consumers and investors to get an accurate picture of what’s happening. »»

However, this rule does not end for companies that have high emissions but have already disclosed their implications. It’s also not a big deal for companies that don’t yet have a viable alternative.

For example, manufacturing, industrial chemicals, cement, pulp and paper are energy-intensive industries, and most investors know this, Brandon Owens, vice president of sustainability for consulting firms. Says. Insight Supply Group.

“I don’t think they’re expected to suddenly decarbonize,” Owens told CNBC. “We want transparency. We can make decisions about this. We want to know that we have plans to start working on our carbon footprint. »»

Winners: Compliance Experts and Software

Companies need help in deciding how to track and report climate risks. According to Riche Sorkin, CEO and co-founder of climate risk analysis firm Jupiter, advisors, consultants and auditors with this expertise are in demand, including many celebrities in insurance and management consulting.

Companies that can automate the carbon accounting and reporting process will also work.

“We can be as successful as Salesforce,” said Kentaro Kawamori, CEO of Persefoni, a software platform that helps businesses analyze, manage, and report on carbon dioxide emissions.

“Just as Salesforce created a customer record recording system, companies like us (with one or two big winners) create a carbon accounting recording system,” Kawamori said. increase.

Sure, financial services companies use artificial intelligence and data analysis in carbon accounting just like financial accounting, but “it will still play a role for humans,” Aggarwal told CNBC.

Loser: Supply chain supplier with messy scope 3 emissions

The rules proposed by the SEC require companies to disclose direct greenhouse gas emissions, called Scope 1 emissions, and emissions from electricity and other energy forms, called Scope 1 emissions. 2. Both are relatively easy to track.

However, as the SEC stated, the proposal also requires companies to track Scope 3 emissions “in critical cases.” Scope 3 emissions are indirect emissions from a company’s supply chain and can be very difficult to track reliably.

According to Joe Schlösser, Senior Manager of No ISN, companies with complex international supply chains can find this particularly difficult. ..

“Industries with more complex supply chains, especially those that rely on international suppliers (apparel, pharmaceuticals, manufacturing), face more challenges in the short term and eventually become part of the supply chain. It may be returned to a domestic supplier or manufactured, “he said. .. ..

Generally speaking, domestic suppliers are easy to monitor, and companies that rely on them also have lower carbon dioxide emissions when shipping parts, Schlesser said.

Big shakes of ESG funds

ESG funds are a huge and growing industry, according to the January Morningstar Direct Report. Sustainable fund assets increased 9% to $ 2.74 trillion as of the end of December 2021.

The SEC’s climate rules help investors make more legal and climate-friendly investments, as there is ultimately a standard way to compare emissions across companies and industries.

“One of the benefits of having a standardized framework for reporting this information is that we can get clear, comparable and reliable data that we don’t currently have,” said Sustainable and Responsible. Brian McGannon, Head of Policy for the Forum, said. The investment told CNBC.

This will allow investors to “compare apples”, McGannon said.

Aggarwal told CNBC that this information could reduce “greenwashing” within ESG funds.

“All this spread of the definition of sustainable or climate funding will change fairly rapidly, so I think you’ll see a lot of big losers there,” Kawamori told CNBC.

On the other hand, ESG funds that have already invested in rigorous tracking and understanding of emission data from component companies, including “very large funds, especially in the field of private equity,” are in a stronger position. Kawamori says. .. ..