Thoughts on Climate Change Disclosure

Am I imagining things, or have people suddenly turned up the heat on corporate disclosure of climate change issues? 

Just today, for example, business and political leaders at Davos (always a leading source of hot air) announced a new framework for corporations to report sustainability metrics according to the U.N. Sustainable Development Goals. Climate change will be a big part of that disclosure. 

There’s more. BlackRock, the largest investment fund in the world, said last week that it will pay far more heed to climate change and sustainability issues as it decides where to invest its $7 trillion pile of cash. BlackRock also joined Climate Action 100+, a group that supports shareholder resolutions calling for companies to do more about climate change. 

Microsoft announced that it will go “carbon negative” by 2030, where the company will remove more carbon from the atmosphere than it emits. That will come from a shift to purchasing all Microsoft’s energy from renewable sources; and from an “internal carbon fee” that Microsoft imposes on each of its divisions, where it bills them $15 per ton of carbon emissions they generate and then spends that money on sustainability efforts. 

Lloyd’s, the British banking giant, said on Tuesday that it will halve the carbon emissions from projects it bankrolls by 2030. Nobody in the United States is promising anything like that yet, but banks are asking more pointed questions about climate change to their loan clients, lest they give money to a project that’s underwater before the repayment schedule ends. 

Sure, much of this news is coming because annual meeting season is looming. That means more corporate sustainability reports touting green policies, more shareholder resolutions about climate change, and more discussion among governance enthusiasts. It also means more companies looking for favorable headlines, so they fire off new pledges to take the issue seriously.

Inexorably, however, climate change is rising up the priority ladder for everyone. PwC just released its annual CEO survey, where 24 percent of its respondents (more than 1,500 CEOs around the world) are “extremely concerned” about climate change risk. Perhaps that’s not surprising: in the Edelman Trust Report released two days ago, 73 percent of respondents said it’s important that their company’s CEO speak out forcefully about climate change. 

OK… so what do we disclose about it, specifically? 

Framework vs. Framework

My concern is that there is too much noise around climate change disclosure right now. We have too many rival frameworks, not enough assurance of a company’s actual disclosures, and no leadership from the regulatory sector. So why should anyone be surprised we have more heat than light on this legitimately important issue?

For example, the framework announced at Davos uses sustainability metrics from the International Business Council, which is part of the World Economic Forum. Meanwhile, BlackRock recommends that companies use standards developed by the Sustainability Accounting Standards Board. Companies can also use standards from the Global Reporting Initiative, ISO 26000, or other sources. The European Union is working on a taxonomy for sustainable business activities, although like all things EU, it isn’t final yet. 

Soooo… that’s too many. Everyone is jockeying for position, rather than following a leader forward. 

What we need is something much more like the standards for financial reporting. One regulatory authority (the Securities and Exchange Commission) requires all publicly traded companies to follow one set of standards for financial disclosure, as developed by the Financial Accounting Standards Board. Those disclosures are audited for accuracy by professional audit firms.

Even better: since 2009, corporations have been required to tag all their financial data using XBRL, so consumers of financial statements can compare information across multiple companies with more speed, precision, and sophistication. 

That’s how you empower investors to use corporate disclosures. You create a single system followed by all, with enough reliability and comparability that every participant can use it. 

We have nothing like that yet for climate change, or sustainability reporting generally. And where we took decades to build the modern financial reporting regime used today — we need to build a sustainability disclosure system, like, right now. 

Getting on With It

People are nibbling at that goal. SASB, for example, is developing an XBRL taxonomy for its sustainability standards that would help investors with apples-to-apples comparison of sustainability disclosure; that’s a step in the right direction, but we should have taken it years ago. At Davos, four firms that support the new disclosure effort there are the Big 4 audit firms — and yes, they’re supporting it because auditing those disclosures would make them more money, but auditing will be part of any workable system we finally develop. They need to be part of this.

The biggest obstacle, of course, is the lack of political will in Washington to confront climate change seriously. 

I’m old enough to remember when Republicans cared about climate change, and had visions of a cap-and-trade market for carbon emissions. That was a good idea because it established a monetary price for carbon emissions — which could then be disclosed, and investors could respond to it, and companies would have economic incentive to generate less of it. Those days are gone for now, of course, but you can’t decarbonize until people see the dollar cost of not decarbonizing. 

So today we’re stuck with a weak rule from the Securities and Exchange Commission that requires discussion of climate change risks, which means you get nothing except a few lines in the Risk Factors section of a 10-Q that climate change is real, but we can’t model the costs yet. And we have a proliferation new frameworks, many of them good, but none with sufficient regulatory support to make a difference to investors. Not yet, at least.

By the way, the all-time record for CO2 levels as measured by the National Oceanic & Atmospheric Administration’s observatory in Mauna Loa, Hawaii is 415.79 ppm

We set it yesterday.

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