The SEC’s climate disclosure proposal could turn private markets into bases

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About the author: Alex Friedman He is the CEO and co-founder of the public utility company Novada.

Important events often lead to a basic government regulatory response. It was with a major recession and is now in a climate crisis.

Nearly 100 years after the formation of the Securities and Exchange Commission, the Commission’s new proposal to manage how public companies expose their climate risks fit exactly into this category. Similar to the introduction of GAAP, the standardized accounting rules for how public companies compile their financial statements. However, the biggest surprise is how this regulation will affect private companies.

Following the stock market crash of 1929 and the ensuing Great Recession, the SEC was created as an independent body to enforce anti-market manipulation legislation. Central to this task was the need for consistent financial reporting standards, so the SEC turned to the accounting industry to develop generally accepted accounting principles. The effect was fundamental as companies — both public and later private — changed what they reported to avoid SEC enforcement. Today, it is easy to forget that at one time companies reported anything and everything, and as a result there were widespread scams.

Last month, the SEC released a new draft plan to include a standardized climate report with required disclosures from public institutions. Chairman Gary Zensler wants companies to directly and indirectly disclose climate change, their plans to reduce emissions and the total amount of greenhouse gases they emit. This last type is dosy. This sets the exposure rules, often referred to as Scope 3 emissions. The SEC requires companies to analyze not only their own emissions, but all emissions from their suppliers, such as purchased goods and services. Jensler understands the inherent challenges in the sweep of demand and seeks to exempt companies that are not Scope 3 targeted. But if public pressure is put on companies to deal with the climate crisis, most public companies already have implicitly such a goal by ensuring that it stays net-zero by a certain date.

Predictably, the public response was different. While some praise the SEC for taking a bold step (the climate disclosure rules on climate disclosure that became UK law last January were not very bold), others argue that the SEC has violated its mandate. To sue. But as the market has already spoken, it is not a bar. Climate exposures of companies are inevitable, as large asset managers will respond as global investors request this information. Consider climate change as the primary topic for shareholder proposals for this year’s proxy season.

But it is not yet understood that the jurisdiction of the SEC is focused General Companies will be affected by all of its climate exposure rules Personal Scale companies. The reason is simple. If a large public company has a net zero target – which they all own or will soon have – it should find outsourcing from its supply chain partners, which are almost universal private companies. Consequently, any private company that sells its products or services to a public company with a net zero target must provide the same type of climate exposure as its largest public shareholder.

According to public policy, this should be a good implication. Carbon emissions and the resulting damage to our climate are the real tragedy of the Commons and all players must do their part, vertically. Because carbon molecules do not regulate their movement according to corporate legal frameworks, new regulations affecting only public companies will lose the boat.

Today there are about 50,000 public companies and 200 million private companies. Assuming that 5% of private companies serve as suppliers to public companies, approximately 10 million companies need to quickly become sophisticated in determining which ESG measurements to use, how to calculate them, where to store data, and how to interpret. And report on it.

This sea transition is similar to GAAP 2.0 in its scope, but is more complicated considering the difficulties in the range of ESG calculations. Most of these millions of private companies are much smaller than their public counterparts and many do not have the analytical skills to lead this challenge. Nevertheless, such private companies employ the vast majority of the world’s working people and focus on the potential for business as a positive lever for change when it comes to climate change. They must be empowered to do their part. Just as the Great Recession created a new field of accounting, the climate crisis – a slow-moving but man-made catastrophe – will lead companies to entirely new businesses to effectively interpret their vital, non-financial data.

Our race faces an existential threat and all key players must be held accountable for doing the right thing. The new disclosure rules of the SEC will help to do that.

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