The topic of financial disclosure rules is not one that normally gets me excited. But as I learnt last week, there are some exciting climate-related changes in the pipeline for Securities and Exchange Commission (SEC) reporting requirements. They will apply to any SEC registrant, which includes many of the world’s largest companies. They should improve ‘climate transparency’ for investors, and incentivize climate-friendly corporate behaviour. Let me explain.
Last Wednesday one of my Utility Industry Leaders Think Tank members, the Chief Procurement Officer (CPO) and Deputy General Counsel at a large east-coast Utility, delivered a Think Tank University ‘lecture’ to our Think Tank community. This CPO is in a pretty unique position, being the only CPO we're aware of who is also a Deputy General Counsel and owns the Proxy Statement. He’s read the entire 480-page proposal document issued by the SEC last year, and he's read it twice. He gave us a run through of the rule changes and shared his view on the implications for supply chain leaders, in particular reporting so called ‘Scope 3’ emissions data about the supply chain and reduction targets.
The proposed rule changes, announced last year, and scheduled to be adopted in 2023, will require reporting disclosures that include prescriptive, consistent, comparable, and reliable climate information. This will make ‘climate-aware’ investing much easier and more transparent, thereby rewarding true ‘climate champions’, and piling pressure on poor performers.
As I listened to the lecture, I was reminded of a quote from Larry Fink, chairman and CEO of BlackRock, the largest money-management firm in the world with more than US$10 trillion in assets under management:
"It is our fiduciary responsibility to make sure the companies in which we invest on behalf of our clients are addressing these material issues, both in managing climate risks and capturing opportunities to grow their business. Only then can they generate the long-term financial returns our clients depend on to meet their long-term investing goals.”
Source: 'Speed and Scale' by John Doerr (published by Penguin)
Those material risks and opportunities include how companies behave with respect to the planet’s climate and its resources. Investors are increasingly evaluating ESG performance as a critical factor in their decision making.
Companies with good credentials represent lower long-term risk for investors. The new rules should make it harder for bad behaviour to remain hidden.
In terms of punishment, well the SEC already requires ‘registrants’ to provide accurate and compliant financial disclosures and routinely investigates those suspected of ‘falling short’. This will be extending to climate related disclosures too, formalising ‘Greenwashing’ as a compliance issue. Companies found to have misled investors can face significant penalties, the potential for further criminal proceedings (look at Deutsche Bank DWS), associated losses and in some cases complete financial ruin (remember the Enron & Lehman Brothers scandals?).
Three implications for supply chain leaders
The lecture inlcuded implications for supply chain leaders around ‘upstream’ Scope 3 emissions reporting. My key takeaways were:
1. Climate aware investor pressure will incentivize companies to move from using ‘secondary’ Scope 3 ‘estimates’ (easier) towards using 'primary' ‘actuals’ (harder). In other words, report using validated activity-specific emissions data from suppliers, rather than using industry averages and emission factors. If companies want to show emissions reduction over time, the only other way is to reduce overall spend, which is not practical. Procurement will need to integrate Scope 3 scoring into sourcing, into contractual obligations, partner with suppliers to reduce emissions ongoing, and use technology and innovation.
2. Procurement will be responsible for the ‘SOX-ification’ of Scope 3 data, across data collection, validation and reporting. It will fall on Procurement to ensure appropriate controls and procedures are in place to demonstrate SEC compliant reporting. This is a BIG responsibility.
3. The SEC acknowledges that Scope 3 is more challenging. It is allowing an extra year to report Scope 3 data, includes safe harbour, and will not require third party ‘attestation’, at least to start with.
The SEC’s job is to protect investors, not save the planet. That said, it is using its ‘superpower’ – disclosure requirements – to drive important changes in how companies share their climate related information with investors. This will help them make better investment decisions that will incentivize real climate-positive action and behaviour. I think that’s a reason to be optimistic.