“If I have to accelerate my carbon transmission program where my entire supply chain, my sources of energy, how much I emit myself, I need to reduce that … well, that’s not going to come free of cost,” he says. “You’re going to have to make an investment in the next three or four years to make that happen, but in the longer term that would be the right thing to do.
“Now, if I am one player in an industry of five, and two industry participants do that and therefore it hurts their short-term profitability, and the other three do not, how do investors look at this?” Gandhi adds. “Which investors will say ‘Oh my God, these guys missed their quarterly earnings. Let’s dump the stock.’” Some companies might resist the criticism, but many companies can’t or won’t put up the near-term capital and risk damaging earnings metrics for a greater good.
Gandhi says the success here depends on three things: investors’ demand for these metrics; company management teams stepping up and discussing how these metrics will affect their long-term value; and finally, the regulators’ requirement that the metrics be furnished—which is currently the missing piece. The reporting is currently voluntary for ESG framework reports. The SEC has created guidance for reporting material factors, but these disclosures aren’t required, which would help, says Gandhi. “If there could be a regulation that said, by industry, here are the standards that you need to disclose, which are relevant for your business, I think that would be a big, big step in the right direction.”
Democratic commissioners on the Securities and Exchange Commission have started nosing in that direction, which could be a harbinger of change under a Joe Biden administration. In a speech on November 5, Commissioner Allison Herren Lee called for more standardized reporting on climate risk.
“The SEC should work with market participants toward a disclosure regime specifically tailored to ensure that financial institutions produce standardized, comparable, and reliable disclosure of their exposure to climate risks, including not just direct, but also indirect, greenhouse gas emissions associated with the financing they provide, referred to as Scope 3 emissions,” Lee said in the speech.
In early September, five standard setting organizations made a joint statement that they were driving at creating performance reporting standards where they were all on the same page (the organizations included the Global Reporting Initiative, the Sustainability Accounting Standards Board, the International Integrated Reporting Council, the Climate Disclosure Standards Board and CDP—the former Carbon Disclosure Project). Also in September, the International Federation of Accountants called for the creation of an International Sustainability Standards Board.
Another SEC commissioner, Caroline Crenshaw, spoke to the need for sustainability reporting in August of this year in a discussion about the modernization of reporting requirements.
“The question of whether climate change and human capital are material concerns of investors is no longer academic,” Crenshaw said. “The 2019 PG&E bankruptcy after the tragic California fires and the more than $220 billion in damages to the U.S. economy from the 2017 hurricane season demonstrate that the risks posed by climate change are here, real, and quantifiable. Companies know how climate change is impacting their businesses, supply chains and the economy overall; so should their investors.”