Investor attempts to evaluate carbon emissions, decarbonization plans, and climate risks using ESG (environmental, social, and governance) ratings have only resulted in the creation of a phenomenon referred to as “aggregate confusion” by certain academic circles. Furthermore, companies have largely evaded repercussions for the lack of clear emissions disclosure or even failing to meet their own benchmarks.
This brings us to a newly instated set of SEC carbon accounting and reporting regulations that appear to merely mirror these issues found in voluntary corporate action, primarily the lack of standard and actionable disclosures. However, far from addressing the urgency of the situation, such an approach will not instigate the necessary changes within the required timeline.
Companies, investors, and the general public are in desperate need of rules that not only usher in changes within the corporations, but are also amenable to external evaluation. Such a system ought to be adept at tracking major sources of corporate emissions and catalyze companies to undertake substantial investments in initiatives directed at achieving deep emissions cuts. This involves efforts both within the companies and throughout their supply chain.
Despite the shortcomings and limitations of the current rules, the encouraging aspect remains to be the potential for regulators, geographical areas, and even the companies themselves to leverage these rules and forge a path toward significant climate action. The wisest companies and investors have already moved beyond the SEC stipulations, creating superior systems for tracking the causes and expenses of carbon emissions, and taking tangible steps in the direction of addressing these issues. These efforts may include reducing fuel consumption, building energy-efficient infrastructure, and embracing lower-carbon materials, products, and procedures.
Adopting carbon reduction measures that also lead to financial savings has now become a sound business strategy. The SEC’s inaugural, albeit imperfect, step toward attempting to align our financial laws with the recognition of climate impacts and risks, is commendable. However, it’s now the responsibility of regulators and corporations alike to act faster, ensuring clear communication regarding the rate at which companies are progressing as they undertake necessary steps and investments to remain economically robust in a transitioning economy, and importantly, an increasingly risky planet.
