ESG Investors Get Big Win With New SEC Climate Rule

podcast from Bloomberg Law. I'm your host, David Schultz. So we've talked a lot of in this podcast about ESG or environmental, social and governance investing, and we're going to be talking about it again today. That's because there was a major development in this field last week. The Securities and Exchange Commission unveiled a long anticipated proposal that would force nearly all publicly traded companies to report way more info on their impact on climate change. Now, this is

significant for two reasons, or at least two reasons. One, the way corporate climate disclosures work now is with some exceptions on a more or less voluntary basis. For example, there are guidelines from the Task Force on Climate Related Financial Disclosure, which I should say is chaired by Michael Bloomberg. But those guidelines don't have the force of law, so it's a big deal. But also another important aspect of the SEC's proposed rules is just how far they go.

Companies won't just have to disclose their own emissions, but also emissions from their supply chains and even in some cases their customers. We're gonna talk about all of this with Bloomberg News Sustainability editor Eric Roston and Bloomberg Tax reporter Amanda I Cone. I'm going to talk with Amanda in a bit about how lucrative these new rules could be for the accounting industry. But first I asked Eric exactly what was in the plan unveiled by the SEC last week. There is a lot in it. It is

five hundred pages or more. It's been in development in some ways for years. The SEC and Ernest has been working on it for about a year. And the just is that it requires publicly traded companies to disclose to their investors and a file in their SEC reports what

their levels of carbon emissions are. And part of the complexity of why it requires so many hundreds of pages is that it's it's not one number, and there's no meter on the side of the factory that tells you what the carbon emissions are in some cases it's easy to calculate. The experts call the different categories of emissions scope one, Scope two, and scope three emissions. Scope one being direct emissions like stuff you burn you're in the fleet of you of your automobiles, if you're on them,

or your busses or whatever it may be. Scope two is like purchased energy through like heating or electricity, and then Scope three, which is sort of a monster, is like supply chain and consumer use emissions. Right, well, I would definitely want to get into scope three in a little bit, but first I wanted to draw the distinction here between a company's carbon emissions, their contribution to the

problem of climate change, and a company's climate risks. For climate risks, it seems like it's a no brainer that this would be in the SEC's jurisdiction here that you know, investors need to know if a company faces risks due to climate change or anything else. But why the company's contribution to climate change. That seems like it's a little bit outside of the where the SEC usually operates. Can you talk a little bit about that. Yeah, it's a

great question and a really important one. It's a lot of things related to this are maybe either actually or charged to be outside of the SEC's regular scope, because so much of climate change is just deeply weird and our institutions are just not prepared to deal with it head on. And the people who really analyze companies emissions talk about two different categories. There's there's physical risks from

climate change, which are obvious enough. They increase risks from from extreme weather events that we're already seeing and that are largely in many cases attributable to climate change. Then there's also what they call transition risks, and these are a diverse basket of risks that may apply to companies

and hurt or help their value. And having a lot of emissions is a problem, particularly if a jurisdiction, you know, a national jurisdiction, regional jurisdiction like European Union, or even subnational jurisdictions as we see in some parts of the world, require carbon pricing. That's a good point that so to sort of rephrase what you're saying, it sounds like a

company's emissions are its risks, absolutely. And there's also an addition to the fact that governments may actually let fees on emissions there's also reputational risks, and you know, we've seen a lot of companies attacked by consumers by investors for not doing anything with their substantial emissions. So let's get back to scope three what you were talking about, which are these sort of indirect emissions from their the company's supply chain, or from the company's products being used.

I have to imagine that's really really hard to quantify. How are companies going to do this? There are methods and it is it is a difficult exercise, but there's a way to do it, and companies have been doing it for years. Uh. You know, companies do a lot of hard, complicated things, and this is a new methodology. You know, a lot of it deals with just analysis of like what are your biggest risks, who are your

biggest suppliers, what are your biggest factories. And they're not asking for a line item of literally every massive of car and that comes out of a car and your fleet. It's asking for judgment and like, if eighty percent of your missions come from ten suppliers, then you figure out the emissions from those ten suppliers, often by talking to them, and you you extrapolate, you know, it's not not an exact science, but but what is, Well, let's not talk

about how we're going to verify these reports, Amanda. One of the interesting things about the proposal is that the Scope three details are not going to be audited under this proposal, but everything else is going to be Who's going to be doing this auditing and how are they going to do it? Sure's first, you know, just circling back to what Eric was just talking about, it's important to remember that all of this are these are all estimates, right,

there's no hard numbers. Just like he said, there's no thing on the side of the building collecting how much emissions are being admitted, right, That's not how it works. There's formulas and how you know, based on this score footage, and there are frameworks out there that help companies do this.

To Eric's point, they've been doing this for years. What the SEC is putting up maybe more specificity around what they should be reporting kind of a baseline, because there's a lot of variation right now and what companies are in art reporting voluntarily. And you know, one of the things that the SEC is asking for is for someone outside of the company to come in and give these

estimates a second look like how accurate are they? And this happens with financial statements since time immemorial, Like this is, you know, nothing new when it comes to earnings, loss, profit, that kind of thing, right, I mean, the difference here is that these are not financial metrics. Financial standards are very well established. They're very rigorous complex there, they have a long history, and accountants are very comfortable and working in with that world. This is a brand new world.

This is you know, the accountants really haven't been involved until this point. And the SEC has also said it doesn't have to be an accounting firm that does that outside verification. It could be an engineering firm. It could be some other sort of boutique firm that's already been doing this kind of work, because again we're talking about some sort of science based engineering type calculus. But it's still an estimate. And accountants test and verify estimates all

the time. They also test processes like you know, cybersecurity, all sorts of computer systems, blockchain. I mean, if a company has it, an accountant can come in and test whether or not it's doing what it's supposed to be doing, whether or not you follow the process correctly and whether or not investors at the end of the day can rely on the information. One of the things that I thought was really interesting about your story on this when it came out is that it seems like the Big Four.

I mean, there are four big accounting firms or audit firms, they're not really that involved in this. You kind of alluded to this earlier that you know, they this is like a different world for them. So who's going to be doing the audits here? I mean, is it going to be like small you know, I think you've reported it's smaller engineering firms? Is do I have that right? Yeah? In the US, because we have this voluntary reporting system, the companies can choose whether or not they have these

metrics verified, and they can choose who does it. And in the US, because it's a voluntary system, they've been picking engineering firms, bo chief consulting firms that specialize in this kind of reporting. And it's not been the accounting

firms In Europe and other places that's flipped. Europe is already inching its way towards requiring mandatory assurance, and so a lot of companies have already begun working with their accounting firms to get that, you know, to work up to meeting that requirement, and so you see accountants much more involved in other parts of the world. And here

the SEC has has left it open. They're willing to consider not just it being the purview of the accounting firms, but that allowing engineering firms and other consulting firms to jump into this market too. The other thing I was thinking about when I was reading your story is that this is going to be really lucrative for these firms

that can do this kind of climate accounting. And I wonder if we're going to see a wave of acquisitions where the big four, you know, just snatch up these small firms because they're like, you know, all these companies need to do this now, and we want to do it for them right well, so you know, it's funny. SEC Commissioner hisstory, Purst mentioned that in her descent she said that this could be the biggest boom since the Starbanes Oxley Act, which required another type of audit over

internal controls. But you know, I think here again the SEC is leaving it open to other firms to provide this. They've also suggested a really big caveat that might open the door for what you're suggesting, which is the Big Four to bring in these smaller, boutique firms into their mix, because the SEC wants these firms to be independent. In other words, you can't help a company set up its controls, set up its data collections, set up its reporting processes,

and then go in and audit that information. You're not allowed to audit your own work in the world of the SEC, you know, So companies are going to have to decide who they hire to help them set up those processes and who they want to do the assurance,

but it can't be the same firm. So it's possible we could see some acquisitions here at the Big Four have already predicted that this is a multi potentially billion dollar business for them, not just on the assurance side, but also on those consulting services, because you know, a lot of the largest companies are well on their way to meeting these proposed vironments, but there's a lot of

smaller companies that aren't. And let's remember, so the SEC is talking about both the largest US companies and really kind of mid to smaller tier companies, and they're going to have to have assurance. Potentially there's a lot of activity, or at least an increasing amount of activity, and something called climate tech, which is a very broad category that covers everything from mobility and energy to stuff like we're

talking about. PwC did a report in December that tallied up the year in climate tech investment and there were just seventy three deals in their category of climate management and reporting. The total about eight hundred million dollars. And a lot of these companies are doing the things that we're talking about, which is writing software or helping companies understand their footprints. You know, the next the next salesforce

for forquirement is out there. So finally, uh, let's we've been talking about the companies and the you know, how they're going to comply with this, and I guess the burden on them to report this information. Let's talk about the other side of the coin here, which are the people who will be receiving this information, the investors and the public. I guess, more broadly, how do green investors people you know, eesg investors, how are they feeling about this?

Are they you know, popping the champagne bottles here? Or do they wish that this would go a little bit further. I think there's not a lot of popping of champagne bottles and climate change to begin with, Oh yeah, that's true. I actually I think it's worth it's worth pointing out as much as possible that, you know, people aren't doing this recreationally. You know, the last eight years are the hottest eight years in the one hundred and forty plus

year record. You know, it was one hundred and twenty three degrees in southwest Canada last summer, and the day after the town that uh, you know, set that record, it was destroyed by wildfire. You know, so coastlines are creeping in. That's going to have real impact on real estate. It's going to have real impact on tourism. And when everything is changing, you know, the dollar signs of everything will change. So that's that's why we're doing this. To

begin with. Now, forward looking investors for at least twenty years have been trying to get a rule like this happened. You know. When proxy is a group called CDP which used to be the Carbon Disclosure Projects, started about twenty years ago, and what they do is they harness investors voices together and ask companies to disclose their you know, their emissions, and that's how a lot of this got started.

So a lot of this is just kind of standard operating procedure at this point, and the SEC just adds muscle to something. You know, half of the Russell one thousand already do something like this with varying quality. Half of the Russell one thousand does not. And I think moving the whole market into a common language is what proponents of this are celebrating. I would just add to that that I think there's a relief that the US is moving in the same direction as much of the

rest of the world. I mean, Asia's moving in this same direction, Canada, Europe, that the US is not going to be an outlier. And there's you know, because the US companies are global, they are going to have to report on these metrics no matter what the US does, and they want consistency in that reporting, no matter where they have to report it, because they don't want to have to do it five different ways for different places.

And there's a there's a real push by the largest companies to get this kind of global consistency, and this is moving in that direction. And I would also say that CFOs and controllers are probably relieved because they again their accountants, right, They like rules. They like to know what the rules are. Just tell me what it is and I'll do it. They'll make it happen. They're in house.

General uncles down the hall might have a very different opinion of this proposal, but you know, corporate accounting departments are already moving to meet these requirements, in part because they're coming and they're coming fast from Europe and they're going to have to do it no matter what the US does. So there are some relief here, but the work isn't over, and that you know, investors have a

lot of demands beyond greenhouse gas submissions. This isn't the end of the road, so to speak, but it is a It is a major shift in insecurities regulation here in the US, to be sure. And that's it for today's episode of Parts for a Billion. If you want more environmental news, check us out on Twitter. We use the handle at environment just that at environment. I don't know how we got that, but we have it. I'm at David B. Schultz if you want to talk with

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