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Get ready, Corporate America: The carbon disclosure mandates are coming

Corporate ESG disclosures

A slew of announcements earlier this month point to new regulations on carbon disclosure. Corporate America better get ready.

The U.S. Securities and Exchange Commission has been particularly busy. Acting chairwoman Allison Herren Lee issued a public statement directing the SEC staff "to enhance its focus on climate-related disclosure in public company filings." In a series of tweets, Lee also aligned with the International Organization of Securities Commissions (IOSCO) statement of an "urgent need to improve the consistency, comparability, and reliability of sustainability reporting, with an initial focus on climate change-related risks and opportunities." Also earlier this month, the SEC hired its first senior policy adviser for climate and ESG. (See a partial transcript from Lee's speech earlier this week here.)

The message is clear: Carbon disclosure will be mandatory.

It’s undeniable that climate risks and opportunities are material to corporate performance and must be included in audited financial statements. This is long overdue, but there can be no doubt that climate disclosure will become a fixture for publicly traded companies.

Britain, New Zealand and Switzerland already have moved forward with unprecedented speed to require disclosures aligned with the Task Force on Climate-Related Financial Disclosures (TCFD). The TCFD, created by the G20 Financial Stability Board, issued its disclosure recommendations back 2017. Since then, thousands of companies, governments and others have lined up in support. 

It’s undeniable that climate risks and opportunities are material to corporate performance and must be included in audited financial statements.

While coming mandates are clear, the required disclosures are still a bit murky. There is real momentum behind the IFRS Foundation’s move to develop international "sustainability reporting" standards. The trustees meeting this month may shed some more light, but don’t hold your breath; the IFRS already has stated that it will "produce a definitive proposal (including a road map with timeline) by the end of September 2021, and possibly leading to an announcement on the establishment of a sustainability standards board at the meeting of the United Nations Climate Change Conference COP26 in November 2021."

With the slow pace of standards development, companies are facing uncertainty about what information to collect. While the requirements are unclear, carbon accounting procedures are well established. The greenhouse gas protocol has been around for many years and sets out a detailed process (more than 700 pages) for measuring corporate carbon footprints. While we wait to see what the required disclosures will be, companies can get a leg up by ensuring that their current carbon reporting is as aligned as possible with the greenhouse gas protocol.

Accounting for carbon emissions from large enterprises is a daunting job. Complex multinational enterprises conduct thousands of carbon-generating transactions each day. Adding to the challenge is the Scope 3 problem: accounting for the carbon generated upstream (across the supply chain, for example) and downstream (products). Even for leading companies, creating assured carbon disclosures is hard work and will require new expertise, collaborations and enterprise-level technologies to streamline the process. Companies should start making those carbon finance hires today.

Corporate leaders and boards also would be wise to get ahead of these regulations and take stock of their carbon management practices now. Having worked for three Fortune 500 companies, I can say firsthand that they won’t like what they find. Carbon management and disclosure is typically done on spreadsheets once per year and the data can be months old. This is not a management system; it’s a way to track annual performance. 

Adding to these gaps is the carbon trading market. Carbon prices in Europe are skyrocketing — surging 60 percent since November — on the news of impending regulation. Simultaneously, there are efforts in Europe and the U.S. to assign monetary value to each ton of carbon, with the Biden administration’s reinvigoration of the "social cost of carbon" initiative. 

And if these developments weren’t enough of a wakeup call, the world’s largest asset manager, BlackRock, made it very clear it would hold the companies it invests in accountable for their carbon management. With $8 trillion under management, this would touch just about every company. Just to make the signal clearer, BlackRock doubled down by signaling it would vote against the boards who fail to meet its standards.

Alarm bells are ringing in the C-suite and boardrooms. Corporate compliance officers will be up late scrambling to develop their carbon disclosure strategy. While there is a lot of work to be done, new resources emerge every day to help companies navigate this challenge.  

After a long career in the sustainability space, it is gratifying to witness the tipping point where sustainability enters the mainstream of global commerce. It’s about time. 

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