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Working Capital

Counting the true cost of climate change

American money falling

American money falling. Image via Shutterstock/MVelishchuk

Some of the biggest businesses in the country are complaining about the projected expense of the U.S. Securities and Exchange Commission’s proposed rule about climate disclosure. The proposed rule mandates that companies must report their greenhouse gas emissions and climate change risks, and that their data be verified by a third party.

The time period for public comments on the SEC’s proposal closed earlier this month. More than 40 U.S. listed companies submitted letters pushing back against the proposal, among them UPS, Gap, Dow and Salesforce.

The flat response from a major, influential business group consisting of 200 CEOs of the country largest companies was unequivocally negative: "Unworkable."

That’s the emphatic position of the Business Roundtable. While touting its members’ status as "industry leaders in climate change action and disclosure," the Business Roundtable raised "serious concerns" about issues of data comparability, legal liability and non-materiality. At the bottom of its list of objections, as if it were only a footnote, is the kicker: It would be expensive. Its comment: "The Proposals’ cost-benefit analysis is fundamentally flawed and significantly understates the ultimate compliance cost of the rules." The Business Roundtable rejects the current proposal and calls for a reboot to satisfy its members’ concerns.

Let’s look more closely at this cost claim.

According to the SEC, the biggest U.S. companies could rack up an estimated $533,000 annually to comply with its proposed new rule. An ongoing expense for a publicly listed small company is projected to be an additional annual cost of $420,000. The estimated, increased total expense for U.S. businesses of all sizes ranges from $3.9 billion to $10.2 billion, depending on whether companies are building on current practice or starting from scratch.

It will take some hard bargaining to find a compromise position for what is, after all, a nascent practice rooted in a profound financial revolution.

Those numbers didn’t come from blue-sky guesstimates. Interestingly, the SEC’s estimate largely echoes the findings of a survey of 35 large, corporate and institutional investors by The Sustainability Institute/ERM, a green consultancy. That poll reports that firms currently spend an average of $533,000 annually while voluntarily providing the information that the SEC’s rule would require. Its findings, outlined in "Costs and benefits of climate-related disclosure activities by corporate issuers and institutional investors," were published before the SEC’s draft and include the caveat that the survey’s cost categories “were not strictly aligned with potential SEC disclosure requirements."

Let’s note for the record that many large companies already disclose some climate data in response to growing pressure from investors. For example, four out of five S&P 500 companies have reported the greenhouse gas emissions from their operations, according to data provider Refinitiv. 

For perspective, measure that projected $533,000 against this number: $270 billion. That’s the total of global losses from extreme weather events in 2021, according to an annual report by insurer Swiss Re. Losses from floods alone, the No. 1 cause, are growing at a faster pace than global GDP. And insured losses have been on a long-term growth trend of 5-7 percent for a while, accelerated by climate change. 

Whining about the cost of providing climate-related data by 200 CEOs also seems a bit rich when considering that chief executives made a median $20 million last year. The 31 percent increase from 2020 is due to increases in stock awards and cash bonuses; stock options make up about 85 percent of CEO compensation, and a rising — until recently — stock market sure floated a lot of CEOs’ yachts. The total CEO "pay" was 254 times more than the average worker in 2021, up 7 percent from the year prior, according to the Equilar 100. (Those looking for a hard number to describe financial inequality could start right there.)

Another measure of cynicism amid complaints about the cost of climate disclosure are the huge sums being paid out by companies for major malfeasance while conducting "business as usual." In the latest such scandal, $6 billion has been forked over by a U.S. unit of Allianz SE to satisfy claims over a "massive fraud" scheme that cost institutional investors and pension funds billions despite promises of "strict risk control," said the SEC. Perhaps Allianz could measure the cost of providing more disclosure on issues such as climate risks against that sizable penalty for devious marketing and conclude that the price of more transparency in its practices is a bargain by comparison.  

And now, we have ongoing investigations into Deutsche Bank and Goldman Sachs about misleading claims for their supposedly transparent ESG financial products. That alleged greenwashing could end up costing one or both entities a pretty penny in fines, not to mention the reputational damage.

Yes, the Business Roundtable is the same organization which, in 2019, issued a revised definition of purpose that defined a "new statement on the purpose of a corporation." The updated position declared a shift from shareholder primacy to stakeholder focus: "Companies should deliver long-term value to all of their stakeholders‑customers, employees, suppliers, the communities in which they live, and shareholders." Its statement also asserted that the "best modern CEOs have been running their companies in this way for a long time."

The implication is that the statement is not to be taken as a radical shift in business practices but simply a "better public articulation of their long-term focused approach," as the Business Roundtable puts it. That PR phrasing includes some arguable points worth digging into more deeply— who are the "best" CEOs and what exactly is "a long time"?

This is not to diminish the Roundtable’s concerns. Issues of data comparability, legal liability and materiality are indeed serious and knotty in their complexity. It will take some hard bargaining to find a compromise position for what is, after all, a nascent practice rooted in a profound financial revolution.

The larger question such leadership as the vastly influential Business Roundtable could also be raising is what is the cost of not dealing with climate change. That just might be immeasurable. 

[Continue the dialogue about ESG and green finance with the invitation-only audience of sustainability, finance and investment leaders at GreenFin 22, taking place in New York City, June 28-29.]

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