Summary:
- The SEC proposed "green" reporting for all stocks traded on the public market. Many companies have already begun implementing this policy.
- Reporting will protect shareholder interests, as the world continues to transition towards a net-zero future.
- Companies who haven't initiated "green" status by 2030, 2050 at the latest, could face financial repercussions -- especially if they wait until the last minute to do so.
- Transparent reporting will further minimize the "greenwashing" that takes place amongst several companies that claim to be ESG-friendly.
- Simple changes to operating equipment can strengthen green policies and heighten support from shareholders
The Securities and Exchange Commission (SEC) has been exploring options that encourage companies to act more sustainably by reporting all environmental, social and corporate governance (ESG) activities to shareholders.
In March, the Commission proposed measures that would require all publicly-traded companies to report all green initiatives in an effort to curb detrimentally high carbon emissions and to promote greener investments for the future of this country – and the world.
Proposed SEC rules would be established to provide investors with a clearer picture of the risks that climate change might pose to the corporate bottom line and any long-term plays in that company. While a number of companies are already providing this data voluntarily, their changes aren’t likely to actually take effect before 2024 – with the largest public companies reporting in 2024 and the smallest in 2026.
The SEC hopes that these new requirements will compel "big business" to own up to their own carbon footprint by disclosing more consistent, emissions-related data – and how these companies expect the value of fossil fuel reserves to steer the future of their brands. And investors will be able to make better, more informed decisions given the risks of investing in companies that do very little to curb carbon-heavy emissions.
This will also make it harder to secure ESG-related financing for companies that would otherwise claim to be environmentally conscious but expend no actual effort in protecting the environment.
The pending disclosure, by itself, isn’t expected to drive companies to speed up their contributions to a greener future. It’s not even expected to significantly help governments achieve global climate goals. But, it’s a step in the right direction, and as it stands, it may be the only hope that society has to encourage real action on behalf of future generations.
There are many who believe ESG efforts are created in vain, as they tend to be extorted by many, governed by few.
Comprehensive green reporting is necessary.
In a world where there are approximately 7.93 billion people on the planet, getting to zero emissions will mean everything to the benefit of a global population.
Currently, air pollution is the cause of between 85,000 to 300,000 premature deaths and illnesses a year in the U.S. alone and is expected to cost an upward of $250 billion in health and climate damage through 2030 – especially in indigenous and low-income communities.
Clean air and decarbonization will allow the country to dodge somewhere around $3 trillion if successfully implemented before 2050.
In August 2021, the Intergovernmental Panel on Climate Change (IPCC) called it a "code red for humanity," begging the international community to do more to protect the environment and end climate change. But, scientists are now saying that it’s “now or never” and that we must do everything it takes to limit global warming.
The next few years are critical in curbing global warming.
In fact, Greg Lacurci of CNBC puts it perfectly when he writes, “Human-caused climate change has fueled hotter temperatures and drier conditions worldwide, and scientists widely believe it’s contributing to worsening disasters like hurricanes, wildfires and heatwaves. The last seven years have been the hottest on record.”
The IPCC strongly suggests that, with scientific confidence, we need to limit warming to 1.5°C immediately if we want to avoid these severe climate impacts. Some researchers, however, say that we are already late and that even taking immediate action would still leave the planet 3.2°C warmer by the middle of this century – and the world is already seeing the effects of this in the rise of "unprecedented heatwaves, terrifying storms, and widespread water shortages.”
Some parts of the world are experiencing a significant loss in vegetation and wildlife due to natural disasters. It’s freezing in places it has never even snowed before. Earthquakes, volcanos, tsunamis and even hurricanes are also happening in areas where it was always believed to be impossible.
Because of this, the newly proposed rules allow for flexibility. But ultimately, businesses would be required to disclose all pertinent information related to the following:
- Scope 1: Direct greenhouse gas (GHG) emissions
- Scope 2: Indirect emissions from purchased electricity or other forms of energy
- Scope 3: GHG emissions from upstream and downstream activities in its value chain
Disclosure of Scope 3 emissions is mandatory only if emissions occur from third-party entities not owned or controlled by the company itself. These would primarily occur in the case of larger corporations that frequently source materials from external sources – or those that regularly partner with outside companies.
The AICPA has outlined in the key components of the proposed climate disclosure requirements that would include climate-related information in a company’s registration statements and periodic reporting, such as on a Form 10-K.
Climate-related risks and their actual or likely material impacts on the registrant’s business, strategy, and outlook would be included in these statements, as would the company’s actual governance of those climate-related risks and relevant risk management processes.
The proposed disclosures would also include transparencies within forward-looking statements, such as projections of future risks or plans related to targets or transitions, and the forward-looking statement safe harbors pursuant to the Private Securities Litigation Reform Act.
Businesses would further need to elaborate on the metrics of climate-related financial statement metrics, the company’s ongoing governance and risk management, as well as any information regarding climate-related targets and goals leading into the great transition.
Investors have begun adopting the idea that greenwashing is essentially fraud.
"Some government and business leaders are saying one thing - but doing another. Simply put, they are lying. And the results will be catastrophic,” stated UN Secretary General Antonio Guterres. And investors are starting to catch on.
Believe it or not, there’s currently no set standard for governance, let alone actual green reporting. Greenwashing is a “thing,” and it definitely exists.
Make no mistake. The environment always has and always will be part of the conversation. But somewhere along the line, big businesses got “hip” to the fact that there were government tax credits, grants and loans available to companies that implement green policies – to reward them for being a good steward of the environment. And needless to say, many of these businesses started taking advantage – often leaving no money on the table for those businesses that really want to make a difference.
Whether the topic is mining, trading cryptocurrencies, processing hemp or creating electric battery parts, the discussion revolves around:
- Creating a more sustainable future
- Developing greener technologies
- Reducing the carbon footprint left behind by big industry and manufacturing
According to Ballard Spahr LLP on JD Supra, “Greenwashing is the conveyance of a false impression or misleading information that a company’s products are environmentally friendly.” This includes ESG-related advisory services and investment products, such as mutual funds, exchange-traded funds (ETFS) and privately funded offerings.
Ballard Spahr goes on to point out that other areas of interest to the SEC include the disclosure of:
- ESG investing approaches
- Practices to prevent violation of the federal securities laws
- Compliance with proxy voting policies,
- The overstatement or misrepresentation of ESG factors considered in portfolio selection or stated in marketing materials
The law firm suggests that going forward, businesses could potentially be scrutinized for what may involve “materially false and misleading statements or omissions,” as the SEC has already flagged existing ESG investments as potentially high-risk investments due to potential fraud and mislabeling.
To date, it’s really been a case of setting rules without appointing rulers.
Green funding is a loosely regulated domain that lacks clearly defined standards.
Green lending is expected to become a $53 trillion industry by 2025. Green lenders and ETFs claim that they’re dedicated to the success of ESG-friendly organizations – and, therefore, would only stand to gain more transparency from the SEC’s decision for future green reporting.
They, themselves, have frequently complained that it can be exceedingly difficult to measure whether a company is actually doing the right thing – or simply collecting a check on the whim that it will actually “go green.” And while ESG funding shows no signs of slowing down, it’s becoming exceedingly difficult to verify ESG behavior.
The movement for environmental, social and corporate governance (ESG) movement was established with the pure intention of combatting the ills of climate change, social inequality and deteriorating environmental conditions.
But with some companies being incentivized for “environmentally-friendly” initiatives that aren’t really taking place, it’s starting to really tick off investors. Even more so, it’s hurting the initiatives that, with funding, could substantially make a difference.
"Having the right policies, infrastructure and technology in place to enable changes to our lifestyles and behavior can result in a 40-70% reduction in greenhouse gas emissions by 2050. This offers significant untapped potential," said IPCC Co-chair Priyadarshi Shukla.
"The evidence also shows that these lifestyle changes can improve our health and well-being," she continues – a movement that seems like a “no-brainer,” at least until one looks at the bigger picture.
McKinsey Global Institute (MGI), the business and economics research arm of the McKinsey & Company consulting firm, has teamed up with several experts across a broad spectrum of industries to analyze and address concerns with the growing need for sustainability and a carbon-free tomorrow.
The report focuses primarily on the environmental, social and economic impact of total electrification and sustainability, taking note of the global energy needs of society, its impact on climate change and resilience and why its critical to develop and follow crucial guidelines for governance in the environmental transition toward full-on implementation and shift in how energy is produced around the planet.
While some countries expect to reach their goals for sustainability no later than 2030, other countries feel more optimistic about waiting until 2050. That is because of economic and societal reliance on emissions-heavy operations. There are many countries that just can’t change the way their country makes its money overnight or the way their villages currently need to live their lives.
There’s a necessary evil going into the global transition. And most investors are in agreeance that as long as companies meet expectations and try to implement green strategies in every way possible, then they deserve a pass for trying to maintain compliance – although keeping temperatures down will require massive changes to energy production, industry, transport, our consumption patterns and the way we treat nature in due time.
Investors want to see a return on investment and a return of the environment.
Some companies – including Apple Inc. (NASDAQ: AAPL), Meta Platforms Inc. (NASDAQ: FB), Google (NASDAQ: GOOGL) (NASDAQ: GOOG) and the Microsoft Corporation (NASDAQ: MFST) – have already begun to release extensive information, although not required, about their greenhouse gas emissions. In fact, the SEC estimates that one-third of more than 7,000 corporate annual reports reviewed between 2019 and 2020 included some sort of climate impact disclosure.
“Publicly traded companies can no longer cherry-pick climate reporting, and investors will have a much better sense of their exposure to material climate risks,” stated the commission’s chairman, Gary Gensler.
“Investors with $130 trillion in assets under management have requested that companies disclose their climate risks,” he continues. The proposed rule would create a solid framework for all publicly traded companies and set this demand into motion.
“Over the generations, the SEC has stepped in when there’s a significant need for the disclosure of information relevant to investors’ decisions,” the commission’s chairman, Gary Gensler, said in a statement.
Investors recognize that climate risks can pose significant financial risks to companies, and investors need reliable information about climate risks to make informed investment decisions.
“Our core bargain from the 1930s is that investors get to decide which risks to take,” he continued, “as long as public companies provide full and fair disclosure and are truthful in those disclosures. That principle applies equally to our environmental-related disclosures, which date back to the 1970s.”
As Alex Freidman, CEO and co-founder of Novata, points out, the SEC’s decision to further regulate reporting could inadvertently change how the private markets operate. This viewpoint is attributed to the fact that there are many publicly-traded companies that do business with other privately-traded companies, and they will now be required to provide information about their business and supply chain partners.
“Today, there are around 50,000 public companies and 200 million private ones,” stated Freidman. “If we assume that 5% of private companies serve public companies as suppliers, it means approximately 10 million companies will have to quickly become sophisticated at deciding which ESG metrics to track, how to calculate them, where to store the data, and how to interpret and report on it.”
In this situation, businesses – not only investors – will be provided with greater discernment when assessing a company’s financial health and governance in deciding whether or not they would like to proceed with, or continue doing business with, their privately-funded partners.
Likewise, laws, weather conditions and international relations will allow businesses to identify ESG and sustainability-related issues that can quickly equate to financial loss and hardship if unable to be controlled. Many cite unexpected environmental risks and tense community relations as some of the most critical challenges they face.
The SEC published its 2022 Examination Priorities report.
The U.S. Securities and Exchange Commission (SEC) Division of Examinations announced its examination priorities for 2022 on March 30, 2022. These fall into five categories:
- Scrutiny of private funding
- Standards of conduct regulation best interest of ESG investing
- Fiduciary Duty and Form CRS for retail investors and working families
- Information security and operational resiliency
- Emerging technologies and crypto-assets
The SEC also focuses on another the “gamification” of investing, as a potentially risky investment made popular through smartphone apps and social media influencers.
Members of the SEC voted 3-to-1 in public issuance of the proposal. For the next two months, the commission will accept public discourse on the matter before working on a final rule and establishing a reporting framework for essential information gathering across all annual reports and stock registration statements.
The public will have up to 60 days to comment on the plan.
Joe Manchin strikes again.
It didn’t take long before the infamous Senator Joe Manchin of West Virginia would oppose the new SEC climate disclosure rule, claiming that these initiatives are actually targeting fossil fuel companies. He also claims that he is “deeply concerned” about the new disclosures and that the proposed changes are unnecessary because nearly two-thirds of companies in the Russell 1000 index already release sustainability reports.
He neglects to address how differently this data is being reported across various companies and how that data is often selectively reported.
In fact, he’s personally calling on the SEC to reconsider its plan to require companies to disclose information about their contribution to heavy carbon emissions – even going so far as accusing the commission of politicizing the rulemaking process, something he’s consistently done himself during his time as Senator.
Joining in with Manchin is the Senate Banking Committee’s top Republican Senator, Pat Toomey from Pennsylvania. He also blasted the rule, exclaiming that it "extends far beyond the SEC's mission."
He and other Republicans seem to be in agreement that those changes would increase the cost of compliance and “go too far” – even for the SEC, whose entire existence relies on the disclosure of relevant data on a company’s performance and financial well-being in order to protect investors, both big and small.
Companies are adopting green policies.
Contrary to popular belief, going “green” is a lot more than switching to organic and adopting electric vehicles (EVs). It’s about sustainability, renewable energies, recycling and limiting emissions. It’s about looking at what a company has and limiting what’s being wasted. It’s about making the most effective use of existing resources, adopting cleaner alternatives and staying innovative.
It’s also important for investors to keep in mind that just because a company chooses to implement recycling programs and green technologies to undercut expenses, it may not be doing so in the name and spirit of “zero carbon emissions.”
Companies need to act quickly to show a decent track record of ESG-friendly initiatives before 2024 – even if that means changing their entire infrastructure from within.
It’s time for businesses to start championing their own core values, as well as the values of nearby communities. They need to start proving their official stance on environmentally-friendly initiatives – through actions, not words – and let their true intentions shine through if they want investors to continue taking them seriously.
And, how do they do it? How could otherwise traditionally “dirty” industries with heavy carbon emissions become greener? Which industrial pain points could be improved through alternative measures, which aren’t that important? How can operations become more self-sustainable and more eco-friendly?
The irony here is that some of the “dirtiest” businesses are among those who yearn to be more innovative, be more cost-efficient, and power their businesses using alternative sources.
From construction to agriculture, mining to manufacturing, so many businesses are left in the dark about new technologies already on the horizon.
Let’s take Greenland Technologies Holding Corp. (NASDAQ: GTEC) and it's wholly-owned subsidiary, HEVI, for example. This company has made a name for itself as a global developer and manufacturer of drivetrain systems for materials handling within diesel-powered industrial equipment. But while the company understands a gas-powered product continues to be needed, its true passion and ultimate focus have been on “going green.”
In fact, this passion has led Greenland to pioneer the world’s first electrified heavy, industrial equipment, including lithium-powered forklifts, excavators and front loaders, and is allowing the company to lead the next generation of commercial, industrial equipment into greener pastures and away from those traditionally dominated by heavy-emission internal-combustion systems.
Unlike competitors such as Caterpillar Inc. (NYSE: CAT), Volvo ADR (OTCMKTS: VLVLY) and Hitachi Ltd. (OTCMKTS: HTHIY), who also have electric versions of loaders and excavators, they’re actually available for commercial and retail sale – which allows even the smallest business to go green through the transition to a “net-zero” future and startup businesses uplist with fewer worries.
There was a need for transformation. And, so they did it.
Businesses, as a whole, really should be creating new green policies with the desire to minimize carbon emissions – even if that’s replacing just one or two pieces of heavy industrial machinery. They should also have a heightened sense of responsibility when it comes to the impact their businesses have on environmental, social and governance (ESG) initiatives.
Sometimes this means cross-collaboration across several market sectors, reusing material wastes – or even inventing an alternative product.
It’s all about adapting to your environment and partnering where necessary – replacing and sun-setting the things of old and adopting innovation. It’s about being open to change and having the passion to pioneer what may just be a new frontier. It’s all about the investors. It’s all about compliance.
We can’t fight the inevitable… It's going to take a global community to raise the bar for our environment. I applaud greater transparency.
DISCLAIMER: The author of this article holds stock in one or more of the above companies mentioned above. This article is meant to inform and educate. It does not and should not constitute as financial advice.