Climate resilience is in the spotlight across the globe, and companies are being called to action. On Earth Day, President Biden announced a sweeping climate agenda to halve U.S. greenhouse gas emissions by 2030 and become net-zero by 2050, accompanied by a $2 trillion infrastructure plan to meet these goals. Corporate leaders and boards across the U.S. are now closely following how to prepare for political influence taking shape in the ESG marketplace.
The call to action for carbon disclosure mandates and government oversight has been foreshadowed by prominent investors like Turiq Fancy, former Chief Investment Officer at BlackRock, the world’s largest asset manager with $9 trillion under management. BlackRock is known to vote against boards who fail to meet their carbon standards.
“Climate change is the greatest market failure in history. Government oversight is necessary to scale climate solutions.”Turiq Fancy
In contrast, Fancy’s former boss, BlackRock’s CEO Larry Fink in his 2021 Letter to CEOs declared ESG “the greatest investment opportunity ever.” Fink, who regularly consults with the Federal Reserve, states that most companies do a poor job of carbon accounting and need to up their game, otherwise regulators will. “Climate risk is investment risk,” Fink emphasizes to CEOs. A “net-zero” economy by mid-century is a “net positive” investment opportunity.
When it comes to ESG performance: low greenhouse emissions plus high ESG scores equals profitability.
As C-suite management and their boards pivot to address their carbon footprint and material ESG risk, being prepared for any upcoming disclosure requirements is key to long-term value creation. Having closely examined the new climate agenda, we’ve highlighted what companies can expect in the coming months and years.
The time to prepare for ESG reporting and disclosure is now
The escalating climate crisis holds center stage for President Biden’s administration agenda. In response to this “threat to our people and communities, public health and economy,” Biden called on the Federal Government to “drive assessment, disclosure, and mitigation of climate pollution and climate-related risks in every sector of our economy.” In April, U.S. Special Presidential Envoy for Climate, John Kerry, said that the nation would likely join Europe in mandating that financial institutions and companies disclose climate change risks and work with European leaders to harmonize disclosure standards. The President also supports stricter climate regulations and removing federal fossil fuel subsidies.
Carbon disclosure and ESG reporting have largely been a voluntary undertaking, now widespread practice among the largest companies in Europe and the U.S. In March of 2021, securities regulators in Europe’s financial markets announced mandatory ESG reporting along with efforts to streamline standards.
Following the Covid-19 pandemic, the bulk of the ESG market growth remains overwhelmingly in Europe with the US only accounting for about one-eighth of inflows. This is expected to change, as American companies respond to the new administration’s aggressive decarbonization goals. It should come as no surprise to CEOs and corporate leaders that Biden will use government influence to encourage a swifter deepening of the ESG marketplace. The time to prepare is now.
New ESG Task Force prioritizes audited, accurate ESG reporting
Since Biden took office, regulators at the Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission and the Federal Reserve have taken multiple steps to address the growing threat that climate poses to the economy. The SEC has been especially active in assessing issuers’ ESG disclosures, determining which are mandatory and reevaluating ESG reporting requirements. In line with this priority, the SEC established a Climate and ESG Task Force in March, led by Kelly L. Gibson, the Acting Deputy Director of Enforcement, to identify ESG-related misconduct, which will enforce ESG-related fraud and enhance its examinations of whether companies’ business continuity and disaster recovery plans are factoring in extreme weather threats.
The SEC also launched a review of corporate climate-related financial disclosures to ensure compliance and update existing guidance. Leading companies are already taking stock of their current ESG data collection, assessment, and reporting processes to ensure accurate, audited ESG data to prepare for new mandates around corporate climate disclosures and ESG risks.
Board Diversity is no longer optional for companies
The “E” in ESG typically dominates in the ESG marketplace, while the “S” moves into center stage, as President Biden takes steps to tackle racial and social inequality through environmental justice initiatives, making “equity for all” a policy goal of his administration.
Not only are board oversight obligations and accountability increasing to mitigate the climate crisis and ESG risk, “board diversity” is no longer optional. The recently reintroduced Improving Corporate Governance Through Diversity Act legislation in the U.S. Congress requires public companies “to disclose the racial, ethnic, and gender composition of their boards of directors and executive officers, as well as the status of any of those directors and officers as a veteran.” Several studies establish the link that diverse boards financially perform better than their less-diverse industry peers.
The Department of Labor (DOL) is responding to Biden’s orderto improve racial equity, increase unionization support, raise the minimum wage and support worker protection. It’s possible the DOL’s new leadership will also reconsider its position on ESG adoption by retirement plans, enabling defined contribution plans to more assertively factor in ESG criteria.
Boards should therefore ensure that they are equipped to effectively manage these new responsibilities and promote diversity. Senior management and boards also need to prepare for labor diversity disclosure and ESG adopted retirement plans.
Companies may be held financially accountable for Greenhouse Gases (GHG) emissions
The Biden administration issued an executive order to reassess the “social cost of carbon” initiative. This effort, which is prevalent in Europe, assigns monetary value to each ton of carbon dioxide, methane, and nitrous oxide. It’s forecasted the Biden Administration will significantly increase the values used to calculate estimates for the Social Cost of Greenhouse Gases (GHG), which embodies measurable climate change effects imposed on the economy and society. So far estimates range between $50 to over $200 per ton of carbon. Office of Management and Budget (OMB), acting on behalf of other White House offices and the Interagency Working Group (IWG) on the Social Cost of GHG, is currently requesting comments on a new Technical Support Document.
Although controversial amongst prominent greenhouse gas emitters, the initiative will be used to assess the benefit-cost tradeoff to society of reductions or increases in allowable GHG emissions. The resulting social cost values will be incorporated into benefit-cost and environmental impact analyses associated with regulatory actions across the federal government and used to guide corporate disclosures on climate and greenhouse gas emissions.
Be prepared for regulators to step forward requiring more robust financial disclosures of your company’s material climate-related impacts, in alignment with existing ESG reporting frameworks. Accurately measuring and accounting for your greenhouse gas emissions using best practices will produce high quality GHG data for your company’s GHG baseline metrics, which supports high-quality disclosure.
New ESG related tax incentives and credits on the horizon for companies
As presidential climate envoy, John Kerry, mentioned, the U.S. prioritizes incentives for climate mitigation. Therefore, under Biden, companies can expect to see new incentives and tax credits to curb their environmental impact and integrate efficient next generation technologies. As an example, Biden will offer tax credit for disaster resilience, ‘next generation industries in distressed communities,’ resilient electric transmission systems, clean energy generation & storage, the modernization of supply chains, and the ‘Made in America Tax Plan,’ which promotes products like American made electric vehicles (EVs).
Green bond issuance is also expected to increase. S&P Global Ratings found that sustainable debt—which includes green, social, sustainability and sustainability-linked bonds—increased by more than 60% in 2020 and forecast that issuance will total more than $700 billion by the end of 2021. Green bonds come with tax incentives such as tax exemption and tax credits, making them a more attractive investment compared to a comparable taxable bond.
To take advantage of green bonds and tax incentives, issuers expect transparent, reliable ESG reporting. Companies that are pre-certified as green and aligned with ESG reporting frameworks will better streamline third party verification and reap the rewards.
Industry-specific operational upgrades
Green operational upgrades are expected for all industry sectors. As per Biden’s $2 trillion infrastructure plan, government investment plans to upgrade and modernize water systems, electricity grids and transportation networks, while greening the built environment using stricter building standards, green appliance incentives, and renewables. The elimination of carbon emissions from natural gas and coal power plants is targeted for 2035.
In December, Biden called for 500,000 charging stations installed for electric cars and made heavy investments in electric vehicle manufacturing. Biden will also aim to implement new fuel economy standards that require heavy duty vehicles to make annual efficiency improvements and 100% of recent sales of light and medium vehicles to come from zero-emission vehicles.
Senior management and their boards are starting to prepare now for enhanced ESG reporting and disclosure. Leading companies are bringing on knowledgeable resources and leading solutions to take full advantage of upcoming climate mitigation incentives. It’s important that ESG policies, procedures and processes are not merely developed, but effectively implemented, to ensure compliance with applicable laws and disclosure requirements.
Good.Lab helps companies set out on a solid path to identify and address ESG-related risks; prepare for enhanced enforcement and regulation; develop tailored ESG strategies; build effective internal controls; and engage in decision-making around ESG disclosures.
Contact us today to learn more about our fractional CSO services and dedicated data solutions to help your company’s team effectively and efficiently measure, manage, disclose, and ultimately reduce your greenhouse gas emissions. Our fractional talent delivers ESG data expertise to create winning carbon disclosure strategies using superior fractional sustainability consulting services.