August 13, 2021
Investors and regulators increasingly want to know how businesses might affect the climate or be affected by it.
By Jean Eaglesham and Shane Shifflett
Aug. 10, 2021 11:12 am ET
From farm to bottler to supermarket cooler, a liter of Coca-Cola creates 346 grams of carbon dioxide emissions, the company’s data show.
That’s less than half the tree-to-toilet 771-gram carbon footprint of a mega roll of Charmin Ultra Soft toilet paper, as measured by the Natural Resources Defense Council, an environmental group.
Math like this is fast becoming obligatory. Investors are increasing pressure on businesses to disclose the emissions of greenhouse gases related to their products and services. Regulators are starting to ask about that, too. Within the next couple of years, every public company in the U.S. might well be required to report climate information.
Such an effort would be the biggest potential expansion in corporate disclosure since the creation of the Depression-era rules over financial disclosures that underpin modern corporate statements. Already it has kicked off a confusing melee as companies, regulators and environmentalists argue over the proper way to account for carbon.
U.S. and European regulators already demand or are expected to require that public companies disclose their greenhouse-gas emissions. That might include the emissions produced by their suppliers and customers.
Regulators also want better disclosure of climate-related risks for public companies. These can range from physical ones such as effects from extreme weather to financial risks such as if a fossil-fuel asset like a coal mine loses value.
“When it comes to disclosure, investors have told us what they want,” Securities and Exchange Commission Chairman Gary Gensler said in a speech last week. “It’s now time for the commission to take the baton.”
The demands from some investors for more and better climate-related information carry increasing weight as “green” financial products surge in popularity. Some $51 billion poured into sustainable U.S. mutual funds and exchange-traded funds last year, according to data provider Morningstar Inc. That was almost 10 times the level of 2018 and represented nearly a quarter of the cash that went into all U.S. stock and bond funds last year, Morningstar said.
The SEC is working on a potential climate-disclosure regulation and has sought public comment. It has the backing of the White House, which has called for drastic cuts in greenhouse-gas emissions. Countries in Europe already require that companies doing business there honor governments’ demands for climate disclosures.
SEC Chairman Gary Gensler says it is appropriate for the agency to bring consistency to company disclosures related to the climate.
PHOTO: MELISSA LYTTLE/BLOOMBERG NEWS
The SEC and other regulators say climate change poses specific risks to companies that investors should be told about. Among them is the risk that companies producing a lot of greenhouse gases could be avoided by some lenders, insurers or investors, either because those parties see the companies as harming the environment or because they view the companies’ businesses as vulnerable. A scientific panel working under the auspices of the United Nations stated in a report Monday that effects of a warming climate are unequivocally driven by greenhouse-gas emissions from human activity.
Like calorie counts on menus, the climate data would be designed to help buyers of shares know what they are getting. And, say proponents of required disclosure, a U.S. mandate would standardize what is now a confusing mishmash.
Corporations already pump out forests-worth of environmental data voluntarily. They are responding to requests for information from investors interested in businesses that have good environmental, social and governance, or ESG, records. Rating firms use the company information to help create ESG grades widely followed by investors.
Currently, the ratings are inconsistent and incomplete, an indication of the work that lies ahead. A Wall Street Journal analysis of ESG grades issued for nearly 1,500 companies by three rating firms found that nearly two-thirds—942 companies—got different grades from different raters. The Journal collected ratings from the websites of three prominent ratings firms in May—Refinitiv Holdings Ltd., MSCI Inc. and Sustainalytics—and identified 1,469 companies scored by all three.
Nearly a third of the companies were deemed ESG leaders by one or more rating firms, but labeled ESG laggards by one or another rater. Credit ratings, by contrast, are broadly consistent.
Investors are eager to buy stocks that rank high on environmental, social and governance factors. But the grades assigned to companies are often inconsistent. Grades given to largest* companies in major industries by three ranking firms.
*by market cap
Source: Wall Street Journal analysis of ESG scores from Refinitiv, Sustainalytics and MSCI
Oil giant Chevron Corp. earned top marks for “excellent relative ESG performance” from Refinitiv, a unit of London Stock Exchange Group PLC. MSCI gave Chevron an average rating. And Chevron got a worst-possible “severe risk” grade from Sustainalytics, owned by Morningstar.
One reason for the difference: The Refinitiv score put more weight on social issues, such as workforce diversity, than on Chevron’s fossil-fuels dependence, the Journal’s analysis showed.
“All ratings providers are measuring different things,” said Julia Giguere-Morello, ESG research director at MSCI. “Some are much more risk-focused, some are impact-focused, some are values-based.”
Lisa Epifani, Chevron’s ESG and sustainability manager, said ESG scores should “come with a bit of a warning” that different methodologies can lead to widely varying scores. A single overall ESG score “could paint a very imprecise picture of a company,” she said.
Some green funds own companies with poor ESG scores from at least one rater. BlackRock Inc.’s iShares ESG Aware MSCI USA exchange-traded fund owns Chevron shares. A BlackRock spokesman said, “We also offer funds that provide targeted exposure to specific sustainable outcomes or some that screen out fossil fuel companies along with a range of other industries.”
Another headache for investors trying to pick green stocks is the variation in how companies report climate information. Most of the biggest 500 U.S. public companies produce annual sustainability reports. The glossy documents share a taste for photos of happy employees and blooming plants. The quality and breadth of their data differ significantly, and little is audited.
Twitter Inc., which says it wants to be “good stewards to our planet,” doesn’t disclose its greenhouse-gas emissions or give a numerical target for reducing them. It says it will set a target within two years. Meanwhile, Twitter highlights efforts it has made such as removing 70,000 plastic toothbrushes from its offices.
The breadth of companies’ voluntary climate reporting varies widely, with Twitter among those that don’t disclose their greenhouse-gas emissions.
PHOTO: DAVID PAUL MORRIS/BLOOMBERG NEWS
By contrast, Microsoft Corp.’s 96-page data-heavy report breaks down its emissions into more than a dozen categories, including those resulting from energy consumption, transportation, employee commuting and the use and disposal of its products.
A Twitter spokeswoman declined to comment. Microsoft said it is “committed to transparency on sustainability.”
Berkshire Hathaway Inc., led by Warren Buffett, stands out for the paucity of its disclosure. It doesn’t report overall climate-related risks. Its Berkshire Hathaway Energy unit, which owns utilities and coal plants, said in a three-page sustainability report: “We strive to achieve net zero greenhouse gas emissions.” It put no date on the target.
Cathy Woollums, chief sustainability officer at Berkshire Hathaway Energy, said it plans to close all coal-fueled units and to have “minimal” greenhouse-gas emissions by 2050. Berkshire Hathaway Inc. declined to comment.
Tesla Inc. discloses the life-cycle emissions of a Model 3 car but not emissions for the company as a whole. Procter & Gamble releases carbon dioxide data companywide but not for individual products. Coca-Cola Co. until recently set a yearly target for reducing “drink in your hand” carbon dioxide emissions related to the production, sale and consumption of a single one of its drinks. It has since switched to a goal of reducing total emissions.
In figuring the carbon footprint of P&G’s Charmin Ultra Soft, the environmental group Natural Resources Defense Council used a calculator from a green advocacy group called the Environmental Paper Network. A P&G spokeswoman said the footprint for its product was based on “general data not specific to P&G supply chains, manufacturing, or disposal.”
A spokesman for the Environmental Paper Network said its calculator, which uses industry averages, is “a science-based, trusted, independent tool.”
Greenhouse-gas emissions fall into three categories, according to a widely used international framework. Those resulting from company operations are called Scope 1. There also are Scope 2 emissions, resulting from energy the company buys. For some companies, the most troublesome to figure are Scope 3: emissions that are related to their products but produced by their employees, suppliers and customers, such as during suppliers’ transportation.
These are a “tremendous challenge” to measure, Walt Disney Co. said in a recent report on its 2030 environmental goals, but it aims to start reporting them by the end of next year nonetheless. Energy company EOG Resources Inc. said in its 2019 sustainability report it “does not believe that it is able to calculate Scope 3 emissions with the accuracy and rigor typically required for EOG’s publicly reported data.”
Coca-Cola, in figuring emissions from employee business travel, looks at flights only; Verizon Communications Inc. includes air and rail travel; AT&T Inc. counts emissions from employees’ air, rail and car travel and is looking at adding travel with ride-share companies.
Coca-Cola has provided a calculation of the carbon dioxide emissions related to the production, sale and consumption of a single drink.
PHOTO: LUKE SHARRETT/BLOOMBERG NEWS
Ben Jordan, senior director of environmental policy at Coca-Cola, said for a global corporation, air travel is much more significant than any other mode. Verizon said it plans to expand its reporting to emissions from rental cars, taxis and hotels. AT&T declined to comment.
The SEC’s Mr. Gensler said in his speech last week he has asked staff to recommend how companies might disclose their Scope 1 and Scope 2 emissions, “along with whether to disclose Scope 3 emissions—and if so, how and under what circumstances.”
The Sustainability Accounting Standards Board, a nonprofit standards setter that is widely followed, says climate risk is likely to significantly affect 68 out of 77 of the industry categories it counts, equating to 89% of the market value of S&P Global 1200 companies, or roughly $45.2 trillion.
Some asset managers say they seek climate data because they want to invest in businesses that can adapt to climate change. “Our goal to de-risk our client portfolios,” said Jonathan Bailey, head of ESG investing at Neuberger Berman Group LLC.
Rick Love was director of environmental sustainability at United Technologies Corp.
Companies would take climate disclosure more seriously, and it would be more accurate, if it were mandated and checked by an outsider, said Rick Love, who retired last year as director of environmental sustainability at United Technologies Corp. soon after it merged with Raytheon Co.
If emissions had to be reported in proxy statements or financial accounts, he said, he would have to vouch for the data to company attorneys. “If you really want data that’s reliable, having it being something that’s auditable strikes me as being a basic requirement,” Mr. Love said.
A Journal review of climate reporting by the 50 largest companies in the S&P 500 found most used an outside auditor for some of the data they voluntarily reported, but verification was significantly less thorough than for financial statements.
The SEC appears determined to use its rule-making power to impose order on the free for all. Mr. Gensler said in his speech last week that he has asked agency staff to prepare proposed rules for mandatory climate-risk disclosure by the end of the year. At a Wall Street Journal CFO Network event in June, Mr. Gensler said it was appropriate for the SEC to help “bring consistency, some comparability, and reliability” by mandating disclosures.
The challenge for regulators is to write rules that would hold up over time in a new and rapidly changing area. They can’t go too far because the effort is already facing political opposition from some Republicans arguing it isn’t the SEC’s job to mandate nonfinancial disclosures. But they feel they need to go far enough so the U.S. isn’t left behind as international regulators issue rules that will apply to many American companies.
Another regulatory challenge is devising disclosures that would be transparent, accurate and universal across a wide range of industries.
“It’s a monumental task. It’s unlikely the first cut at this will be perfect,” said Robert Jackson, a former SEC commissioner who is now a law professor at New York University.
An SEC request for comments on how it should proceed drew more than 550 responses. Three out of four backed mandatory disclosure, according to Mr. Gensler’s speech. Some companies saw required climate disclosure as a solution to unrelenting requests they get from big investors and rating firms for ESG data.
These create “a myriad of cumbersome and time-consuming commitments for companies,” Uber Technologies Inc. told the SEC. Apple Inc. and Walmart Inc. were among companies echoing Uber’s call for compulsory reporting and standards.
An Uber pickup station at Los Angeles International Airport.
PHOTO: CHRISTIAN MONTERROSA/EPA/SHUTTERSTOCK
A plea from some businesses, though, was for protection from lawsuits in case their climate data or forecasts prove wrong. SEC officials have said they are considering this.
Some industry bodies, including the U.S. Oil and Gas Association and Western Energy Alliance, told the SEC it didn’t have legal authority to compel disclosures and impose its value judgments. And Patrick Morrisey, West Virginia’s Republican attorney general, wrote that “West Virginia will not permit the unconstitutional politicization of the Securities and Exchange Commission. If you choose to pursue this course we will defeat it in court.”
The legal threat is unlikely to deter the agency, according to Harvey Pitt, a former SEC chairman. “Whether or not the litigation will succeed will depend on how aggressive the SEC’s rule-making turns out to be,” he said.
SEC officials say they want to move as fast as possible, not least because of actions other countries are taking. Some U.S. companies selling into Europe and elsewhere must comply with overseas rules.
This year alone, the European Union, U.K., Switzerland and China have proposed or finalized green-reporting rules, affecting tens of thousands of companies. The Group of Seven leading rich countries called in June for mandatory climate-related financial disclosures.
SEC officials have said they are considering creating a new standards-setter for ESG disclosures, along the lines of the Financial Accounting Standards Board, a body that would have expertise in matters like climate science, alternative energy and environmental risks.
The SEC, which was created to protect investors, typically regulates publicly traded companies. Some investors and companies want it to apply climate disclosure rules to private companies, too, saying that otherwise it would be harder for public companies to report on emissions generated by suppliers and customers. Others argue the SEC lacks legal power to impose the requirement on private companies.
Appeared in the August 11, 2021, print edition as 'Climate Accounting Looms for Companies.'
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