The SEC Will Require Companies to Report on Climate Impact

No more greenwashing. That is the message the Securities and Exchange Commission (SEC) sent to publically traded companies this week when it announced rule changes that will require companies to disclose the climate impact of running their businesses. The new reporting requirement is directed at companies that declare they are "climate-friendly" and is intended to protect investors who back these stocks or funds that invest in "climate-friendly" businesses. These companies, especially many in the meat-alternative food space, will be required to periodically report exactly how much and the type of greenhouse gases they release into the atmosphere in every aspect of manufacturing their products. It extends to everything from the business plan, approach, growing, assembling, shipping and byproducts.

That means companies like Beyond Meat, Eat Just, Oatly, and all kinds of plant-based alternative brands, in making claims that they are planet-friendly and reduce the environmental impact of food by not using animals in the process or product, will need to show that their total greenhouse gas emissions are, in fact, doing less harm (and also more good for the environment) by manufacturing plant-based or vegan products the way they do.

Investing in vegan and environmentally sound companies

The standardization and reporting are likely to take some time to implement, but a rule such as this is directed at protecting investors more than consumers – since the SEC, founded in 1930 to protect investors, is the regulatory arm of the financial markets. (The FTC oversees advertising claims and the FDA watches out for food safety.) As more and more Exchange Traded Funds claim their focus is investing in so-called climate-friendly companies including food, beverage, and beauty brands, the SEC is essentially saying: Prove it.

EFTs such as VGN and EATV, from VegTech, sell bundled stocks that promise investors they are kind to the environment, do not harm animals, and avoid stocks that pollute or threaten ecosystems. EatV is cofounded by a veteran plant-based business reporter and consultant Elysabeth Alfano who has written on plant-based business trends for The Beet.

One such investment firm, Beyond Investing, launched the world's first vegan-centered ETF on the New York Stock Exchange back in 2019, with the ticker VEGN. Comprised of stocks that are "vegan-friendly," the fund is designed with the health and safety of people, animals, and the planet in mind. So the question is: If you're an investor who cares to back such companies, are you getting what you pay for?

The US Vegan Climate Index is another way that investors are being sold into funds that avoid companies involved in unethical practices. Its unique screening process weeds out animal exploitation, child labor, high carbon-intensity production, the burning or extraction of fossil fuels, single-use plastics, and so much more. The US Vegan Climate Index claims that it holds companies to strict standards, but now the SEC is going to standardize the ratings.

The SEC will set the "climate" goalposts

In a statement from the SEC, it said the ratings will: "Include information about climate-related risks that are reasonably likely to have a material impact on their business, results of operations, or financial condition, and certain climate-related financial statement metrics in a note to their audited financial statements. The required information about climate-related risks also would include disclosure of a registrant’s greenhouse gas emissions, which have become a commonly used metric to assess a registrant’s exposure to such risks.

"I am pleased to support today’s proposal because, if adopted, it would provide investors with consistent, comparable, and decision-useful information for making their investment decisions, and it would provide consistent and clear reporting obligations for issuers," said SEC Chair Gary Gensler.

"Our core bargain from the 1930s is that investors get to decide which risks to take, as long as public companies provide full and fair disclosure and are truthful in those disclosures. Today, investors representing literally tens of trillions of dollars support climate-related disclosures because they recognize that climate risks can pose significant financial risks to companies, and investors need reliable information about climate risks to make informed investment decisions.

"Today’s proposal would help issuers more efficiently and effectively disclose these risks and meet investor demand, as many issuers already seek to do. Companies and investors alike would benefit from the clear rules of the road proposed in this release. I believe the SEC has a role to play when there’s this level of demand for consistent and comparable information that may affect financial performance. Today’s proposal thus is driven by the needs of investors and issuers."

What the climate rules state

The proposed rule changes would require a registrant to disclose information about:

1. The registrant’s governance of climate-related risks and relevant risk management processes.

2. How any climate-related risks identified by the registrant have had or are likely to have a material impact on its business and consolidated financial statements, which may manifest over the short-, medium-, or long-term.

3. How any identified climate-related risks have affected or are likely to affect the registrant’s strategy, business model, and outlook.

4. The impact of climate-related events (severe weather events and other natural conditions) and transition activities on the line items of a registrant’s consolidated financial statements, as well as on the financial estimates and assumptions used in the financial statements.

For registrants that already conduct scenario analysis, have developed transition plans, or publicly set climate-related targets or goals, the proposed amendments would require certain disclosures to enable investors to understand those aspects of the registrants’ climate risk management.

The gold standard: Defining greenhouse gas emissions

The SEC defines climate impact as total greenhouse gas emissions, stating: "The proposed rules also would require a registrant to disclose information about its direct greenhouse gas (GHG) emissions (Scope 1) and indirect emissions from purchased electricity or other forms of energy (Scope 2). In addition, a registrant would be required to disclose GHG emissions from upstream and downstream activities in its value chain (Scope 3), if material or if the registrant has set a GHG emissions target or goal that includes Scope 3 emissions."

These proposals for GHG emissions disclosures would provide investors with decision-useful information to assess a registrant’s exposure to, and management of, climate-related risks, and in particular transition risks. The proposed rules would provide a safe harbor for liability from Scope 3 emissions disclosure and an exemption from the Scope 3 emissions disclosure requirement for smaller reporting companies. The proposed disclosures are similar to those that many companies already provide based on broadly accepted disclosure frameworks, such as the Task Force on Climate-Related Financial Disclosures and the Greenhouse Gas Protocol.

Under the proposed rule changes, accelerated filers and large accelerated filers would be required to include an attestation report from an independent attestation service provider covering Scopes 1 and 2 emissions disclosures, with a phase-in over time, to promote the reliability of GHG emissions disclosures for investors.

The proposed rules would include a phase-in period for all registrants, with the compliance date dependent on the registrant’s filer status, and an additional phase-in period for Scope 3 emissions disclosure.

The proposing release will be published on SEC.gov and in the Federal Register. The comment period will remain open for 30 days after publication in the Federal Register, or 60 days after the date of issuance and publication on sec.gov, whichever period is longer.

For more about how plant-based food choices impact the environment, check out The Beet's environmental news.