Just oversight? SEC rules on climate disclosure

US SEC HQ, Washington; by AgnosticPreachersKid, CC BY-SA 3.0 via Wikimedia Commons

There’s news on the regulation of climate change: The US Securities and Exchange Commission has published its “final rules” on climate disclosure, designed “to enhance and standardize climate-related disclosures by public companies and in public offerings”. It’s good news, too, sort of.

Around the world a problem plaguing those who urge progress on corporate efforts to reduce carbon emissions is the lack of comparability of data across industries and even among close competitors. There are dozens of “standards”, an alphabet soup of them. Which means there are no standards. This glut means that even well-meaning companies often change the approach they use in reporting their progress and settling their strategies. Those wishing to deceive – greenwashing – are free to do so.

Climate disclosure is not at all like financial accounting. While US Generally Accepted Accounting Principles – known as GAAP – differ in detail from other systems, they are in outline broadly in line with International Finance Reporting Standards, Japanese GAAP and other systems. We know about accounting, have done since the 13^th century. Counting money is simple.

But climate is a much messier affair. Just one example of many is international supply chains: Who would you say is responsible for the climate impact of shipping an engine part from Vietnam to Japan for integration into a kit of a car with other parts from Australia, Malaysia, the United States and Germany, which will be boxed up and shipped to Europe or the United States for assembly and then shipped to a dealer for sale to the end customer?

More than a dozen years ago, a student told a story to a class I taught. He’d worked several years at Toyota before starting his Master’s. The company’s hybrid car, the Prius, was the best performer on carbon emissions back then. The supply chain was so complex, the student said, that it would take 10 years before a Prius would begin to be a net contributor to emissions reductions. I was sceptical about his calculation. Was he sure he was comparing like with like? Was the supply chain of a Prius that much more elaborate than those with internal combustion engines?

But my challenge, I now accept, was beside the point. The real issue is that we ought to be taking carbon out of the atmosphere, not the relative supply chain emissions of a Prius or some other car.

Through that discussion I arrived at the view that the very simplicity of accounting standards was the source of the problem. If that view is right, then maybe, just maybe, accounting standards could be the basis of a solution. Carbon is what economists call an externality. Without standards, and with accounting for them, emissions are somebody else’s troubles. As the song (and album) of the great Steve Goodman in 1972 tells us: “They don’t make you lose any sleep at night.”

Fast forward to March 2024, and the SEC’s rulemaking. It demands reports from both corporate boards and management about their “oversight” of climate-related activities of the firms they direct. One of the sad things about the language is the ambiguity of the word “oversight”. It can mean both “supervision” and “failing to supervise”. Will this be a case of the SEC failing to?

It looked for a while as though corporations in the United States were going to have to start losing sleep. The SEC ran a long consultation to try to come to a standard that might become a tough regime, much as the European Union’s corporate sustainability directive sought to develop or along the lines of the attempts to standardise sustainability disclosures under the aegis of the IFRS Foundation.

But toughness has little meaning without enforcement, so maybe the SEC felt it was better to get something on the books, a base to build upon, when politics permits. For the time being, companies listed on US markets might be able to sleep a bit more easily. At least the presence of these three initiatives all point to a direction of travel towards something more like standards and less like soup. And maybe these aren’t really final rules but more a step along the way.

Let’s recall how Steve Goodman ended his story:

I asked the undertaker what it took to make him smile 
when all he ever saw was people crying. 
First, he hands me a bunch of flowers that he'd received on my behalf. 
He said, “Steve, business just gets better all the time.”

Here’s the problem: It isn’t somebody else’s troubles. It’s ours.

And this: For a succinct and insightful depiction of externalities, take a look at this segment of the 2003 film “The Corporation”, produced in the wake of the Enron debacle, and the book it spawned (Bakan, 2004). Yes, the film is tendentious, playing with emotive devices more than it makes use of rational argumentation. Yet the segment on externalities is supported by careful, thoughtful people, including Milton Friedman. Have a look.

Bakan, J. (2004). The Corporation: The Pathological Pursuit of Profit and Power (Revised and expanded ed.). London: Constable & Robinson.