By Cecilia Bremner, Law and Policy Clerk
|NASA on The Commons 2017|
All companies face great physical, transitional, and legal risks from climate change. For utilities specifically, these risks are numerous. They include exposure to natural disasters; regulatory uncertainty as environmental compliance requirements change; customer base variations; and inherent technology, supply, workforce, and cybersecurity threats. These risks also overlap with concerns over fuel uncertainty, asset divestment, business model overhauls, decommissioning, safety, and geopolitics.
Stakeholders are becoming increasingly aware of such climate-related risks and are increasingly requesting more detailed climate-related disclosures from SEC registrants, including investor-held utilities. This has led to the current situation where utility companies are all at different stages of their environmental, social, and governance (ESG) journey and climate reports are inconsistent and potentially include greenwashing. In response, on March 21, 2022, the U.S. Securities and Exchange Commission (SEC) proposed a new rule to enhance and standardize climate-related disclosures.
Adopting this new SEC rule “would require registrants [to] provide certain climate-related information in their registration statements and annual reports.” The rule proposes numerous climate-related disclosures broadly aligned with accepted climate disclosure frameworks such as the Task Force on Climate-related Financial Disclosures (TCFD). The disclosures proposed include reporting potential risks and material business and strategy impacts; Scope 1, 2, and 3 (if material or if the registrant has a Scope 3 target) greenhouse gas (GHG) emissions; other qualitative and quantitative climate risks such as financial impacts of severe weather events and natural disasters; and climate-related risk governance and risk-management processes. In addition, the rule would require registrants to provide plans to comply with their publicized environmental claims and would phase in assurance requirements for certain SEC filers.
These reporting requirements signal that all public companies need to transition to investor-grade reporting, and quickly. Such a transition would involve accelerating climate-related reporting processes and building or transitioning to effective reporting controls. PricewaterhouseCoopers (PwC) identifies five actions that every company should consider now for this transition: 1) form a cross-functional team for ESG performance accountability; 2) ensure expected data is appropriately collated for regulators; 3) establish an ESG strategy; 4) upskill corporate leadership; and 5) prepare for independent, third-party assurance.
In addition to these five generally applicable actions, PwC also identified three considerations for utilities specifically. First, utilities should consider how they will delineate between routine costs of supplying reliable energy to customers and recovering from typical weather incidents versus the proposed SEC climate-related disclosures. Second, utilities should consider how they will deal with Scope 3 emissions that are material or for which they have set GHG targets. Even with decarbonization efforts, Scope 3 emissions will likely be material for utilities in “industry-specific, high-emitting categories such as ‘fuel and energy-related activities’ and ‘use of sold products.’” Third, utilities should consider how they will address the challenge of providing accurate and reliable data by zip code in the proposed rule’s accelerated timeline.
Despite such challenges, adopting the proposed SEC rule is likely to drive real action in the transition to a low-carbon economy and utilities can be a major player. Utility operations result in Scope 2 emissions which are indirect emissions from purchased electricity, steam, heating, and cooling. In 2020, Scope 2 emissions accounted for 25 percent of U.S. GHG emissions. Transitioning to low-carbon power can therefore have a significant impact on reducing overall U.S. GHG emissions.
Reducing Scope 2 emissions is also one of the initial and increasingly more economical decisions. Utilities focused on clean energy and low-carbon energy will have a competitive advantage over higher carbon footprint companies. Stakeholders will trend towards supporting companies responsible with their emissions and other climate impacts, as we are already seeing. Thus, utilities that take the initiative to transition to a renewables-based grid and build resilience against climate change will capture a significant portion of the market in transition while also protecting their business in the long-term.
Furthermore, U.S. investor-owned utilities are in a good position to incorporate the proposed SEC rule. The industry already has an ESG sustainability reporting template. This template was last updated in May 2021, after the SEC announced its plans to release the proposed rule. It seems the energy sector has therefore, seriously considered how to properly report climate information for the industry and that those utilities already using the industry template are in a good position to adapt their climate reports to any final SEC rule.
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