Speaker 1: If you're a climate change activist, you were pretty happy
Speaker 1: last week, or at least as happy as a climate
Speaker 1: change activist can be. Today, on Parts Pervilion, we talk
Speaker 1: about the new rule that will require corporations to disclose
Speaker 1: mountains of climate data to their investors and to the public. Hello,
Speaker 1: and welcome back once again to Parts Pavilion, the environmental
Speaker 1: podcast from Bloomberg Law. I'm your host, David Schultz. So
Speaker 1: we've talked a lot of in this podcast about ESG
Speaker 1: or environmental, social and governance investing, and we're going to
Speaker 1: be talking about it again today. That's because there was
Speaker 1: a major development in this field last week. The Securities
Speaker 1: and Exchange Commission unveiled a long anticipated proposal that would
Speaker 1: force nearly all publicly traded companies to report way more
Speaker 1: info on their impact on climate change. Now, this is
Speaker 1: significant for two reasons, or at least two reasons. One,
Speaker 1: the way corporate climate disclosures work now is with some
Speaker 1: exceptions on a more or less voluntary basis. For example,
Speaker 1: there are guidelines from the Task Force on Climate Related
Speaker 1: Financial Disclosure, which I should say is chaired by Michael Bloomberg.
Speaker 1: But those guidelines don't have the force of law, so
Speaker 1: it's a big deal. But also another important aspect of
Speaker 1: the SEC's proposed rules is just how far they go.
Speaker 1: Companies won't just have to disclose their own emissions, but
Speaker 1: also emissions from their supply chains and even in some
Speaker 1: cases their customers. We're gonna talk about all of this
Speaker 1: with Bloomberg News Sustainability editor Eric Roston and Bloomberg Tax
Speaker 1: reporter Amanda I Cone. I'm going to talk with Amanda
Speaker 1: in a bit about how lucrative these new rules could
Speaker 1: be for the accounting industry. But first I asked Eric
Speaker 1: exactly what was in the plan unveiled by the SEC
Speaker 1: last week. There is a lot in it. It is
Speaker 1: five hundred pages or more. It's been in development in
Speaker 1: some ways for years. The SEC and Ernest has been
Speaker 1: working on it for about a year. And the just
Speaker 1: is that it requires publicly traded companies to disclose to
Speaker 1: their investors and a file in their SEC reports what
Speaker 1: their levels of carbon emissions are. And part of the
Speaker 1: complexity of why it requires so many hundreds of pages
Speaker 1: is that it's it's not one number, and there's no
Speaker 1: meter on the side of the factory that tells you
Speaker 1: what the carbon emissions are in some cases it's easy
Speaker 1: to calculate. The experts call the different categories of emissions
Speaker 1: scope one, Scope two, and scope three emissions. Scope one
Speaker 1: being direct emissions like stuff you burn you're in the
Speaker 1: fleet of you of your automobiles, if you're on them,
Speaker 1: or your busses or whatever it may be. Scope two
Speaker 1: is like purchased energy through like heating or electricity, and
Speaker 1: then Scope three, which is sort of a monster, is
Speaker 1: like supply chain and consumer use emissions. Right, well, I
Speaker 1: would definitely want to get into scope three in a
Speaker 1: little bit, but first I wanted to draw the distinction
Speaker 1: here between a company's carbon emissions, their contribution to the
Speaker 1: problem of climate change, and a company's climate risks. For
Speaker 1: climate risks, it seems like it's a no brainer that
Speaker 1: this would be in the SEC's jurisdiction here that you know,
Speaker 1: investors need to know if a company faces risks due
Speaker 1: to climate change or anything else. But why the company's
Speaker 1: contribution to climate change. That seems like it's a little
Speaker 1: bit outside of the where the SEC usually operates. Can
Speaker 1: you talk a little bit about that. Yeah, it's a
Speaker 1: great question and a really important one. It's a lot
Speaker 1: of things related to this are maybe either actually or
Speaker 1: charged to be outside of the SEC's regular scope, because
Speaker 1: so much of climate change is just deeply weird and
Speaker 1: our institutions are just not prepared to deal with it
Speaker 1: head on. And the people who really analyze companies emissions
Speaker 1: talk about two different categories. There's there's physical risks from
Speaker 1: climate change, which are obvious enough. They increase risks from
Speaker 1: from extreme weather events that we're already seeing and that
Speaker 1: are largely in many cases attributable to climate change. Then
Speaker 1: there's also what they call transition risks, and these are
Speaker 1: a diverse basket of risks that may apply to companies
Speaker 1: and hurt or help their value. And having a lot
Speaker 1: of emissions is a problem, particularly if a jurisdiction, you know,
Speaker 1: a national jurisdiction, regional jurisdiction like European Union, or even
Speaker 1: subnational jurisdictions as we see in some parts of the world,
Speaker 1: require carbon pricing. That's a good point that so to
Speaker 1: sort of rephrase what you're saying, it sounds like a
Speaker 1: company's emissions are its risks, absolutely. And there's also an
Speaker 1: addition to the fact that governments may actually let fees
Speaker 1: on emissions there's also reputational risks, and you know, we've
Speaker 1: seen a lot of companies attacked by consumers by investors
Speaker 1: for not doing anything with their substantial emissions. So let's
Speaker 1: get back to scope three what you were talking about,
Speaker 1: which are these sort of indirect emissions from their the
Speaker 1: company's supply chain, or from the company's products being used.
Speaker 1: I have to imagine that's really really hard to quantify.
Speaker 1: How are companies going to do this? There are methods
Speaker 1: and it is it is a difficult exercise, but there's
Speaker 1: a way to do it, and companies have been doing
Speaker 1: it for years. Uh. You know, companies do a lot
Speaker 1: of hard, complicated things, and this is a new methodology.
Speaker 1: You know, a lot of it deals with just analysis
Speaker 1: of like what are your biggest risks, who are your
Speaker 1: biggest suppliers, what are your biggest factories. And they're not
Speaker 1: asking for a line item of literally every massive of
Speaker 1: car and that comes out of a car and your fleet.
Speaker 1: It's asking for judgment and like, if eighty percent of
Speaker 1: your missions come from ten suppliers, then you figure out
Speaker 1: the emissions from those ten suppliers, often by talking to them,
Speaker 1: and you you extrapolate, you know, it's not not an
Speaker 1: exact science, but but what is, Well, let's not talk
Speaker 1: about how we're going to verify these reports, Amanda. One
Speaker 1: of the interesting things about the proposal is that the
Speaker 1: Scope three details are not going to be audited under
Speaker 1: this proposal, but everything else is going to be Who's
Speaker 1: going to be doing this auditing and how are they
Speaker 1: going to do it? Sure's first, you know, just circling
Speaker 1: back to what Eric was just talking about, it's important
Speaker 1: to remember that all of this are these are all estimates, right,
Speaker 1: there's no hard numbers. Just like he said, there's no
Speaker 1: thing on the side of the building collecting how much
Speaker 1: emissions are being admitted, right, That's not how it works.
Speaker 1: There's formulas and how you know, based on this score footage,
Speaker 1: and there are frameworks out there that help companies do this.
Speaker 1: To Eric's point, they've been doing this for years. What
Speaker 1: the SEC is putting up maybe more specificity around what
Speaker 1: they should be reporting kind of a baseline, because there's
Speaker 1: a lot of variation right now and what companies are
Speaker 1: in art reporting voluntarily. And you know, one of the
Speaker 1: things that the SEC is asking for is for someone
Speaker 1: outside of the company to come in and give these
Speaker 1: estimates a second look like how accurate are they? And
Speaker 1: this happens with financial statements since time immemorial, Like this is,
Speaker 1: you know, nothing new when it comes to earnings, loss, profit,
Speaker 1: that kind of thing, right, I mean, the difference here
Speaker 1: is that these are not financial metrics. Financial standards are
Speaker 1: very well established. They're very rigorous complex there, they have
Speaker 1: a long history, and accountants are very comfortable and working
Speaker 1: in with that world. This is a brand new world.
Speaker 1: This is you know, the accountants really haven't been involved
Speaker 1: until this point. And the SEC has also said it
Speaker 1: doesn't have to be an accounting firm that does that
Speaker 1: outside verification. It could be an engineering firm. It could
Speaker 1: be some other sort of boutique firm that's already been
Speaker 1: doing this kind of work, because again we're talking about
Speaker 1: some sort of science based engineering type calculus. But it's
Speaker 1: still an estimate. And accountants test and verify estimates all
Speaker 1: the time. They also test processes like you know, cybersecurity,
Speaker 1: all sorts of computer systems, blockchain. I mean, if a
Speaker 1: company has it, an accountant can come in and test
Speaker 1: whether or not it's doing what it's supposed to be doing,
Speaker 1: whether or not you follow the process correctly and whether
Speaker 1: or not investors at the end of the day can
Speaker 1: rely on the information. One of the things that I
Speaker 1: thought was really interesting about your story on this when
Speaker 1: it came out is that it seems like the Big Four.
Speaker 1: I mean, there are four big accounting firms or audit firms,
Speaker 1: they're not really that involved in this. You kind of
Speaker 1: alluded to this earlier that you know, they this is
Speaker 1: like a different world for them. So who's going to
Speaker 1: be doing the audits here? I mean, is it going
Speaker 1: to be like small you know, I think you've reported
Speaker 1: it's smaller engineering firms? Is do I have that right? Yeah?
Speaker 1: In the US, because we have this voluntary reporting system,
Speaker 1: the companies can choose whether or not they have these
Speaker 1: metrics verified, and they can choose who does it. And
Speaker 1: in the US, because it's a voluntary system, they've been
Speaker 1: picking engineering firms, bo chief consulting firms that specialize in
Speaker 1: this kind of reporting. And it's not been the accounting
Speaker 1: firms In Europe and other places that's flipped. Europe is
Speaker 1: already inching its way towards requiring mandatory assurance, and so
Speaker 1: a lot of companies have already begun working with their
Speaker 1: accounting firms to get that, you know, to work up
Speaker 1: to meeting that requirement, and so you see accountants much
Speaker 1: more involved in other parts of the world. And here
Speaker 1: the SEC has has left it open. They're willing to
Speaker 1: consider not just it being the purview of the accounting firms,
Speaker 1: but that allowing engineering firms and other consulting firms to
Speaker 1: jump into this market too. The other thing I was
Speaker 1: thinking about when I was reading your story is that
Speaker 1: this is going to be really lucrative for these firms
Speaker 1: that can do this kind of climate accounting. And I
Speaker 1: wonder if we're going to see a wave of acquisitions
Speaker 1: where the big four, you know, just snatch up these
Speaker 1: small firms because they're like, you know, all these companies
Speaker 1: need to do this now, and we want to do
Speaker 1: it for them right well, so you know, it's funny.
Speaker 1: SEC Commissioner hisstory, Purst mentioned that in her descent she
Speaker 1: said that this could be the biggest boom since the
Speaker 1: Starbanes Oxley Act, which required another type of audit over
Speaker 1: internal controls. But you know, I think here again the
Speaker 1: SEC is leaving it open to other firms to provide this.
Speaker 1: They've also suggested a really big caveat that might open
Speaker 1: the door for what you're suggesting, which is the Big
Speaker 1: Four to bring in these smaller, boutique firms into their mix,
Speaker 1: because the SEC wants these firms to be independent. In
Speaker 1: other words, you can't help a company set up its controls,
Speaker 1: set up its data collections, set up its reporting processes,
Speaker 1: and then go in and audit that information. You're not
Speaker 1: allowed to audit your own work in the world of
Speaker 1: the SEC, you know, So companies are going to have
Speaker 1: to decide who they hire to help them set up
Speaker 1: those processes and who they want to do the assurance,
Speaker 1: but it can't be the same firm. So it's possible
Speaker 1: we could see some acquisitions here at the Big Four
Speaker 1: have already predicted that this is a multi potentially billion
Speaker 1: dollar business for them, not just on the assurance side,
Speaker 1: but also on those consulting services, because you know, a
Speaker 1: lot of the largest companies are well on their way
Speaker 1: to meeting these proposed vironments, but there's a lot of
Speaker 1: smaller companies that aren't. And let's remember, so the SEC
Speaker 1: is talking about both the largest US companies and really
Speaker 1: kind of mid to smaller tier companies, and they're going
Speaker 1: to have to have assurance. Potentially there's a lot of activity,
Speaker 1: or at least an increasing amount of activity, and something
Speaker 1: called climate tech, which is a very broad category that
Speaker 1: covers everything from mobility and energy to stuff like we're
Speaker 1: talking about. PwC did a report in December that tallied
Speaker 1: up the year in climate tech investment and there were
Speaker 1: just seventy three deals in their category of climate management
Speaker 1: and reporting. The total about eight hundred million dollars. And
Speaker 1: a lot of these companies are doing the things that
Speaker 1: we're talking about, which is writing software or helping companies
Speaker 1: understand their footprints. You know, the next the next salesforce
Speaker 1: for forquirement is out there. So finally, uh, let's we've
Speaker 1: been talking about the companies and the you know, how
Speaker 1: they're going to comply with this, and I guess the
Speaker 1: burden on them to report this information. Let's talk about
Speaker 1: the other side of the coin here, which are the
Speaker 1: people who will be receiving this information, the investors and
Speaker 1: the public. I guess, more broadly, how do green investors
Speaker 1: people you know, eesg investors, how are they feeling about this?
Speaker 1: Are they you know, popping the champagne bottles here? Or
Speaker 1: do they wish that this would go a little bit further.
Speaker 1: I think there's not a lot of popping of champagne
Speaker 1: bottles and climate change to begin with, Oh yeah, that's true.
Speaker 1: I actually I think it's worth it's worth pointing out
Speaker 1: as much as possible that, you know, people aren't doing
Speaker 1: this recreationally. You know, the last eight years are the
Speaker 1: hottest eight years in the one hundred and forty plus
Speaker 1: year record. You know, it was one hundred and twenty
Speaker 1: three degrees in southwest Canada last summer, and the day
Speaker 1: after the town that uh, you know, set that record,
Speaker 1: it was destroyed by wildfire. You know, so coastlines are
Speaker 1: creeping in. That's going to have real impact on real estate.
Speaker 1: It's going to have real impact on tourism. And when
Speaker 1: everything is changing, you know, the dollar signs of everything
Speaker 1: will change. So that's that's why we're doing this. To
Speaker 1: begin with. Now, forward looking investors for at least twenty
Speaker 1: years have been trying to get a rule like this happened.
Speaker 1: You know. When proxy is a group called CDP which
Speaker 1: used to be the Carbon Disclosure Projects, started about twenty
Speaker 1: years ago, and what they do is they harness investors
Speaker 1: voices together and ask companies to disclose their you know,
Speaker 1: their emissions, and that's how a lot of this got started.
Speaker 1: So a lot of this is just kind of standard
Speaker 1: operating procedure at this point, and the SEC just adds
Speaker 1: muscle to something. You know, half of the Russell one
Speaker 1: thousand already do something like this with varying quality. Half
Speaker 1: of the Russell one thousand does not. And I think
Speaker 1: moving the whole market into a common language is what
Speaker 1: proponents of this are celebrating. I would just add to
Speaker 1: that that I think there's a relief that the US
Speaker 1: is moving in the same direction as much of the
Speaker 1: rest of the world. I mean, Asia's moving in this
Speaker 1: same direction, Canada, Europe, that the US is not going
Speaker 1: to be an outlier. And there's you know, because the
Speaker 1: US companies are global, they are going to have to
Speaker 1: report on these metrics no matter what the US does,
Speaker 1: and they want consistency in that reporting, no matter where
Speaker 1: they have to report it, because they don't want to
Speaker 1: have to do it five different ways for different places.
Speaker 1: And there's a there's a real push by the largest
Speaker 1: companies to get this kind of global consistency, and this
Speaker 1: is moving in that direction. And I would also say
Speaker 1: that CFOs and controllers are probably relieved because they again
Speaker 1: their accountants, right, They like rules. They like to know
Speaker 1: what the rules are. Just tell me what it is
Speaker 1: and I'll do it. They'll make it happen. They're in house.
Speaker 1: General uncles down the hall might have a very different
Speaker 1: opinion of this proposal, but you know, corporate accounting departments
Speaker 1: are already moving to meet these requirements, in part because
Speaker 1: they're coming and they're coming fast from Europe and they're
Speaker 1: going to have to do it no matter what the
Speaker 1: US does. So there are some relief here, but the
Speaker 1: work isn't over, and that you know, investors have a
Speaker 1: lot of demands beyond greenhouse gas submissions. This isn't the
Speaker 1: end of the road, so to speak, but it is
Speaker 1: a It is a major shift in insecurities regulation here
Speaker 1: in the US, to be sure. And that's it for
Speaker 1: today's episode of Parts for a Billion. If you want
Speaker 1: more environmental news, check us out on Twitter. We use
Speaker 1: the handle at environment just that at environment. I don't
Speaker 1: know how we got that, but we have it. I'm
Speaker 1: at David B. Schultz if you want to talk with
Speaker 1: me about anything that's b as in, be careful. Friday
Speaker 1: is April Fool's Day. Today's episode of Parts for a
Speaker 1: Billion was produced by myself, David Schultz, and Andrew Sadder.
Speaker 1: Parts for a Billion was created by Jessica Coombs and
Speaker 1: Rachel Dagle, and it is edited by Zach Sherwood and
Speaker 1: Chuck McCutcheon. O executive producer is Josh Block. Thanks everyone
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