In late March, the U.S. Securities and Exchange Commission issued a sweeping proposal that would require publicly traded companies to disclose climate change risks that are likely to affect their business, as well as their direct and indirect greenhouse gas emissions.
While the rules will likely be challenged by national business advocacy groups that have accused the SEC of overstepping its authority, energy sector analysts say the rule change comes as a growing number of both public and private companies are disclosing their companies’ effect on the environment.
Foresight Management Vice President Mike Troupos.
As this information is increasingly included in environmental, social, governance (ESG) reports, companies are facing growing pressure from investors that want to know about environmental exposure and how firms are tackling the climate crisis.
Multiple publicly traded companies — including Jackson-based utility Consumers Energy, Zeeland-based automotive manufacturer Gentex Corp., and Traverse City-based specialty and vintage auto insurer Hagerty Inc. — either declined to comment on the proposed rules or said they are under review.
“We are pursuing an industry-leading Clean Energy Plan that includes affordable and clean energy solutions for all of our customers,” Consumers spokesperson Brian Wheeler said in an emailed statement. “In many cases, we already collect and report data that would be disclosed if the new rules are finalized later this year. We’re continuing to evaluate this proposal to be sure we and other energy providers are focused on providing information on material risks and to ensure our reporting process for the newly required disclosures meets the standards required for SEC reporting.”
In particular, the proposed rules would require publicly traded companies to disclose both direct and indirect — known as “Scope 3” — emissions from operations as well as their supply chain. The SEC earlier this month extended a public comment period on the new rules.
Meanwhile, MiBiz recently spoke with Mike Troupos, vice president at Grand Rapids-based energy consulting firm Foresight Management, about what the rules could mean for businesses as well as ongoing progress being made involving corporate climate disclosures.
Why are these proposed rules so significant?
It’s going to be pretty significant in the fact that many public organizations have considered reporting their carbon emissions, but what we find is that a majority of companies that are doing it are larger. A majority of smaller companies were not reporting. It’s a big deal that this would be a compliance thing — if you want to be a public company, you have to report your Scope 1, 2 and 3 emissions. Most companies are getting a good handle on Scope 1 or 2, your direct emissions, however, Scope 3 is your supply chain. GM is probably the easiest, most relevant to us in Michigan. It’s a company really trying to wrap its arms around Scope 3 emissions.
Who would these rules apply to?
It’s only for publicly traded companies, but we are finding that a lot of private equity firms — which may be buying up companies, spinning them out or pushing them to go public — want the optionality. For the PE firms, it’s not just the SEC rule on carbon emissions, it’s the ESG: ‘If we need to know what kind of ESG risk we’re getting into, we think we can get more money for when we sell them.’
How much of this disclosure is going on currently?
I don’t know, because it’s not mandated. There are two ways companies will report it: Either through a sustainability or ESG report where they’re openly disclosing their emissions, or through a public route.
Where does Foresight fit into this — are you advising companies on how to prepare for these rules?
Yes. We’re an outsourced energy manager and help our clients through the whole process through strategy, figuring out what our goals are going to be and collecting all of the data required to report emissions. To do Scope 1 and 2 emissions, you need to collect energy consumption in buildings and data on diesel fuel, gasoline, propane and other fuel usage. We also help clients improve their carbon emissions and identify ways to be more efficient and use less energy in their buildings. We work with a lot of public companies, most of our clients are at that $20 billion market cap and smaller.
What is the best way for companies to manage those indirect Scope 3 emissions that are outside of their direct operations?
A lot of companies, especially the ones doing Scope 1 and 2 emissions, are just starting to ask about that. There’s a few things you can do. There are 15 categories of Scope 3 emissions, including your employees commuting to work and business travel. For most of our industrial clients, the biggest one is purchased goods and services. First, we’ll figure out, of all of the Scope 3 categories, which ones you’re emitting in. If there are purchased goods and services in your supply chain, we’re working with them to make a lower-carbon product. Could we hold more meetings on Zoom to lessen airline travel? Things like that.
Groups openly criticizing the proposal have vowed to fight it, but are you already seeing an increase among public companies that are voluntarily disclosing these emissions and climate risks?
Absolutely. Companies with a $10 billion market cap and smaller over the last year have really exploded. A lot of companies are realizing, if we want to tap into capital markets and get premium valuations for our business, this is something we have to invest in. From a business standpoint, it’s not a lot of investment. Another big thing is the ‘great resignation’ — if we have a business listening to employees who are saying this is important, that’s a great way to attract and retain talent. A lot of businesses are seeing this beyond the myopic rules. They want to retain young talent and make sure they’re durable, saying: ‘This is a chance to grow our business at a time when other businesses are shrinking.’ Others are saying: ‘Yes, this is coming, we’re going to get ahead of it, and we know it’s best for us anyway.’