The United States leads the world in greenhouse gas emissions, yet trails other high-emission countries in adopting national climate change policy. But there is hope. With the recently passed Inflation Reduction Act and newly proposed regulations from the Securities and Exchange Commission (SEC), the U.S. can significantly curb its contributions to global warming.
The public health risks posed by climate change have been extensively documented. Most recently, these include health risks from heat waves, floods, displacement, and overpopulation. Proposed adaptations include updated agricultural practices, individuals reducing emissions, and climate-smart policies. But when 100 companies are responsible for 71% of greenhouse gas emissions, corporate regulation is clearly needed.
Transportation, electric power production, and industry are the largest sources of greenhouse gas emissions in the U.S. The 2022 Inflation Reduction Act provides government investments in clean transportation and electricity generation. By tackling the two top emissions categories, it will reduce U.S. greenhouse gas emissions by 40% by the end of the decade.
Investments in clean energy will not turn off the tap of corporate emissions. But regulating industry has proven a challenge for the U.S. government. In a recent blow to EPA’s power, a Supreme Court ruling limited the federal government’s abilities to curb greenhouse gas emissions from coal-fired power plants. But if companies were accountable to climate-minded investors, they would have financial incentive to curb greenhouse gas emissions. That is exactly what the SEC is attempting to do.
In March 2022, the SEC proposed rules that would require public companies to disclose extensive climate-related information in their public filings.
The SEC’s mission is to foster fair conduct in financial industry and protect investors from risk. One way they do this is by requiring periodic reporting of information by publicly traded companies. In March 2022, the SEC proposed rules that would require public companies to disclose extensive climate-related information in their public filings, including disclosing their direct and indirect greenhouse gas emissions from throughout their supply chains.
Companies have rallied against such regulations. They argue that the costs of estimating indirect emissions are extensive and might burden the small companies that feed the supply chain. But the proposal specifies that good faith estimates based on industry averages are acceptable when direct measurement is unavailable. And investing money in sustainable practices now is good for business in the long-term. Climate change is a source of financial risk to companies and to the larger economy: a 2018 survey found that 215 of the largest global companies faced nearly $1 trillion in risk from climate change impacts. Clearer disclosures will benefit companies by aiding their risk evaluation and strategic planning.
The SEC will face legal challenges to this proposal. Opponents argue that these disclosure requirements go beyond what a reasonable investor would need to know. But this is not the first time the SEC has added disclosure requirements related to financial risks from climate change. They mandated disclosure of risk factors related to environmental law compliance in 1971 and included guidance on climate-related risk disclosure in 2010. And investors want this information: 65% of investor commenters have called for reporting on all three types of emissions proposed in the rule.
Companies such as Coca-Cola and Tesla voluntarily report climate-related information. But there are no standardized requirements in place: while Coca-Cola discloses emissions facilities, suppliers, and consumers, Tesla only discloses emissions from one line of cars. The proposal offers a standardized disclosure template that will enable investors to compare climate-change risk among companies.
With climate change rapidly progressing, more of the population will feel the effects. Companies are increasingly releasing their climate-change related information to interested consumers without an SEC mandate. With standardized information in hand, consumers and investors will have the power to invest in companies with lower climate-related risk. As worsening economic outcomes have been increasingly linked to adverse health outcomes in the U.S., we need bold measures from unlikely sources to reduce the financial and health risks of climate change.
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