Disclosure requirements for U.S. industry greenhouse gas (GHG) emissions are inevitable. However, what form these requirements will take is unclear, according to Alex Scott, associate professor and Gerald T. Niedert Professor of Supply Chain Management, at the University of Tennessee, Knoxville’s Haslam College of Business. Scott has published research on transportation sustainability reporting in academic journals and recently wrote a series of articles on the emissions reporting standards for Haslam’s Global Supply Chain Institute’s blog. As evidence of these rules’ fait accompli, Scott cites several developments.
Early last year, the Securities and Exchange Commission (SEC) released proposed federal climate-related disclosure requirements for publicly traded companies, and invited public comment on the requirements. So far, the clamor from industry has delayed the rules’ release.
Opposite the pushback from American industry, the SEC is facing pressure to move forward with the standards. The European Union instituted similar regulations in January, which large U.S. companies listed on E.U.-regulated markets must comply with beginning in 2025. California also recently passed sweeping new legislation that will require thousands of businesses making more than $1 billion annually that operate in California to report their direct and indirect emissions. Gov. Gavin Newsom has already confirmed he will sign the legislation into law. Scott believes this regulation has the practical effect of a federal mandate.
“The law California passed pretty much applies to all the major companies, because so many do business there,” he says. “According to a Wall Street Journal editorial, even if they just advertise through Google, which is based in California, they are covered by it. I don’t think the SEC is going to come out and be super-strict immediately, but I do think eventually it’ll get there.”
Emissions Rules Could Have a Major Impact
The new emissions rules could have powerful effects if they force companies to report all GHG emissions in their supply chain. Such language was included in the proposed SEC rule, drawing nearly 15,000 public comments, a record number.
“If that is part of it, companies like Walmart will be required to report the emissions all throughout their supply chain, not just in Walmart stores,” Scott says. “This will be a big deal if it happens.”
Rules’ Degree of Complexity Matters
More intricate and complex reporting requirements mean more challenges for industry and company compliance.
“Any reporting requirements that are this complex and applicable to so many different industries should take a high-level approach,” Scott says. “You don’t want a centralized standards board specifying exact approaches for all different industries and settings. My view as a business professor is, if it’s required, industry needs to have an efficient way of doing this, so it doesn’t have 10,000 different people doing the same thing. We can have a standardized way of doing it, such that it’s a small administrative burden.”
Consumers Will Feel the Costs
Burdens on companies increase as standards become more onerous, meaning they will be more expensive to comply with.
“All those costs eventually get passed on to the consumer,” Scott says. “It’s not like it gets taken away from the profit margins. Maybe in the short term it will, but in the long term, it all goes back to us. That’s why, if this is going to happen, we as consumers want it to be done at low cost to companies.”
Moderate Reporting Requirements Have Been Proposed
In one GSCI blog post, Scott explained sustainability reporting guidance recently suggested by the International Sustainability Standards Board (ISSB), a London-based group associated with the International Financial Reporting Standards organization:
“The standards are general guidelines with room for interpretation. The words ‘reasonable’ and ‘reasonably’ appear … 71 times. Other phrases that allow for interpretation, such as ‘without undue cost or effort,’ ‘requires management to apply judgement’ and ‘faithful representation,’ are used throughout the document.
ISSB applies the “without undue cost or effort” phrase to its recommended reporting for supply-chain-derived emissions. Scott believes this gray area could allow companies and regulators to find a “sweet spot” between cumbersome and costly granular-level emissions monitoring and reporting based on overly broad, high-level emissions assumptions that underestimate GHG releases and are ultimately ineffective.
“All you want to be is accurate, comparable, efficient and transparent,” Scott says. “You want to minimize the administrative burden while being fair and objective.”
Proof of Lowering Emissions Required
Since emissions reports will be publicly available, any business that publicly claims to be working toward zero emissions should have emissions disclosures to support those claims, or they could face lawsuits. Scott points out that such a lawsuit has already been filed against a company for making “false” and “misleading” statements about its sustainability efforts.
“Big law firms are warning businesses to be careful here,” Scott says. “If you’re saying you’re doing this one thing and you’re not, then you’re going to get people saying, ‘I bought their product because they said they were going to have no emissions.’ You’re increasing your legal risk by making the pledge if your reporting doesn’t support it.”
Regulations Will Be Phased In
Scott explains that while there will be inevitable tumult when the emissions disclosure rules are finalized and announced, companies and industries will have an adjustment period.
“They will have a phase-in period,” Scott says. “The standards will probably be adopted in 2024, and they will say try your best in 2025 to comply. Then at some time it becomes, ‘You must adhere to these particular standards’.”
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CONTACT:
Scott McNutt, business writer/publicist, rmcnutt4@utk.edu
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