Carly Joos ’22
Digital Content Editor
Connect with Carly on LinkedIn
A new wave of capitalism may be looming as the latest proposal from the Securities and Exchange Commission (SEC) directly ties the future of business to environmental and social impact. On March 21st, the SEC proposed new rules for reporting on environmental, social, and governance (ESG) metrics. These rules would require public companies to disclose their contributions to global warming, such as greenhouse gas (GHG) emissions, and evaluate the threats that climate change poses to their operations. This proposal is an essential step in compelling corporations to think critically about their impact on our planet and society, but is not a silver bullet to bring about true disruptive and systemic change.
Many companies, both public and private, already voluntarily disclose their social and environmental impacts. KPMG’s 2020 Survey of Sustainability Reporting indicated that 80% of N1001 companies worldwide, and more than 90% in North America, report on sustainability. So, if companies are already reporting on sustainability and ESG metrics, why is the SEC proposing new rules?
1The N100 refers to a worldwide sample of 5,200 companies. It includes the top 100 companies by revenue in each of the 52 countries and jurisdictions researched in this study. These N100 statistics provide a broad-based snapshot of sustainability reporting among large and mid-cap firms around the world.
A major problem in ESG reporting today is that companies lack clear guidelines on how to actually do it. There are countless reporting frameworks that companies can use, including the Global Reporting Initiative (GRI), Sustainability Accounting Standards Board (SASB), Task Force on Climate-Related Financial Disclosures (TCFD), and many more. Each framework varies in scope, for example focusing exclusively on environmental impacts such as GHG emissions, or financial impacts of climate change, or a broad range of ESG topics. Sometimes companies elect to use more than one framework, but often they choose only one, omitting critical information that their stakeholders may want to see. This makes it difficult for investors to compare ESG risks across companies. The SEC’s proposal solves for this problem by offering consistent guidelines that all publicly traded US companies will be required to use.
You might be wondering why the SEC, which focuses on informing and protecting investors, is proposing ESG reporting rules rather than another governing body like the Environmental Protection Agency (EPA), whose mission is to protect human health and the environment. The EPA carries out their mission by sponsoring and conducting research and developing and enforcing environmental regulations. While these activities are critical for supporting climate science, the EPA does not shape financial policy. Investors have begun to realize the threat that climate change poses to the future success of business and are increasingly demanding insight into the non-financial performance of their investments. This comes as a new generation of employees and consumers, Millennials and Gen Z, are more inclined to align their employment and their purchases with their values. These generational trends also threaten businesses that don’t begin taking climate change seriously.
The SEC’s proposal is an important steppingstone for the sustainability community. We can predict and hope that as companies begin disclosing their ESG metrics and climate risks, those who perform poorly will suffer from drops in share price and inhibited access to capital. But this is precisely why the proposal is not a silver bullet – there is no guarantee that ESG disclosures will force companies to actually transform their operations to be more sustainable.
“This proposal is long overdue (we are playing catch-up with Europe). It would provide valuable information to investors and the public at-large, and would help inform the development of public policy,” commented Charles Schnitzlein, UVM’s Grossman Endowed Chair in Finance, and Academic Director of the Sustainable Innovation MBA program. “Nevertheless, critics of the proposal abound, and if the rule is enacted, it will surely face legal challenges from the usual suspects (right-wing think tanks, the fossil fuel industry, and politicians from coal and oil producing states).”
Already the proposal is receiving critical feedback from industry groups protesting that the new rules will drive up compliance costs and impact company profitability. If companies aren’t willing to spend money to report on what they already do, then they certainly won’t be willing to invest in more environmentally sustainable practices. Meanwhile, environmentalists argue that the new rules won’t require all companies to report on Scope 3 GHG emissions due to various exemptions. Scope 3 emissions are those that are generated outside the walls of the company, such as by suppliers or consumers, and are often much greater than Scope 1 and 2 emissions combined.
The reality is that traditional business leaders and environmentalists are unlikely to agree on the role of business in the fight against climate change. We are in a race against time as we work to limit the impacts of global warming and must accept and celebrate small steppingstones, like the SEC’s proposal, as wins. “There is scientific consensus that there is a rapidly closing window to prevent catastrophic climate change. This proposal would help. Let’s hope it is enacted!” Professor Schnitzlein concluded hopefully.
When it comes to climate change, the widely debated quote “you can’t manage what you can’t measure” reigns true – businesses must begin quantifying their impact on the planet to begin reducing it. The SEC’s proposal lays the foundation for exactly that. From there, we can continue to advocate for systemic change and support businesses as they transition to truly sustainable operations.
The opinions expressed in this article are my own, and do not represent the views of UVM or the Sustainable Innovation Review editorial team.
 Threlfall, Richard, Jennifer Shulman, Adrian King, and Wim Bartels. “The KPMG Survey of Sustainability Reporting 2020.” KPMG, December 2020.
 Kiernan, Paul. “SEC Floats Mandatory Disclosure of Climate-Change Risks, Emissions.” The Wall Street Journal. Dow Jones & Company, March 22, 2022. https://www.wsj.com/articles/sec-to-float-mandatory-disclosure-of-climate-change-risks-emissions-11647874814.