Implications of SEC Climate Disclosure Rules for Sustainability Education and Governance
Despite the controversy and complexity, some version of the SEC’s nearly 500-page carbon disclosure rules will almost certainly be enacted this spring. The European Union is requiring broader disclosure of environmental and social governance actions of listed companies. This means that business managers need to pay more attention to the impact of their companies on people and the planet. It also means that disclosures that were once voluntary and unclear will soon become mandatory and specific.
In Columbia University’s Master of Sustainability Management program, our faculty and staff have been discussing the curricular changes needed to respond to this change in our world. At our most recent meeting, I asked our faculty to reflect on their courses and, where appropriate, update them to account for the changes that the enactment of the SEC climate rule will bring. For example, we knew our corporate sustainability reporting, greenhouse gas measurement, sustainability finance and sustainability management courses needed updating. I understand that many of our practicing teachers are already revising their courses as they begin to prepare for SEC and EU rules in their own professional practice.
Due to the complexity of the SEC climate rules, we are offering several new courses to help interested students gain a deeper understanding of the disclosure rules and their possible impact:
- SEC Climate Information Disclosure Compliance Management: This course will teach students how to develop the organizational and management skills needed to comply with the new disclosure rules.
- Understanding SEC Rules: Non-Attorney Disclosure Laws: This course aims to explain the legal aspects of disclosure law to our students who do not have a legal background. It will cover topics from voluntary to mandatory disclosure, and address SEC rules and EU regulations, preparing students for these requirements of multinational, global organizations.
- Scenario Analysis: Risk Identification and Quantification: This course is designed to enable students to apply the concepts they have learned about risk and disclosure requirements in specific organizational contexts. Based on case studies, the course will teach students how to identify and quantify environmental risks and will address practical solutions to common problems faced when implementing sustainability reporting.
Our faculty and staff find that issues such as environmental sustainability, organizational governance transparency, and community impact are becoming increasingly important to the day-to-day management of many organizations. We believe it is important that the sustainability professionals we are educating and graduating are prepared for these changing conditions and ready to manage in this changing environment.
There are some conservative ideologies who oppose SEC rules, which I think are reflexive and anti-regulatory. This is the idea that all regulation is bad for business. If that was true, we wouldn’t need the SEC’s financial disclosure rules or any accountants. Even in favor of the concept of an open environment, practical issues of rule definition and governance capacity still need to be addressed. Like all new rules, these new rules will not be self-enforcing. Putting them into practice takes time. Some conservatives see carbon disclosure as some kind of “lucid” fever dream, even though much of the push for disclosure standards has come from investors.
At present, more than 90% of the S&P 500 companies have issued corporate sustainability reports, but the indicators used to report corporate sustainability vary widely, making cross-company comparison impossible. When FDR created the SEC, he initiated financial disclosure rules requiring public companies to adhere to standard definitions of revenue, expenses, and profits, and that those results be audited by certified firms. That means investors can trust their lack of confidence in the 1920s, when investing in the stock market was like betting in a casino. The 1929 crash was partly due to a lack of financial disclosure rules. Once the SEC starts requiring and regulating financial disclosures, investors can be confident that the financial data they are seeing is real and that they have the information they need to judge the risk of their investments. It also means investors can compare the financial risks of different companies.
Carbon disclosure is the first step in the environmental risk reporting required by the government. I see this new rule as a step in the door. The details of the rules are less important than the facts of the rules. Just as financial disclosures have changed over the past few decades, so will environmental disclosures. As we learned a few weeks ago in East Palestine, Ohio, reckless and incompetent organizational practices can lead to catastrophic environmental impacts that in turn result in millions, if not billions, of dollars at financial risk. Investors need to understand these risks. Disclosing environmental risks involves measuring them against standard definitions. These standard definitions provide clear measures that organizations can use to manage risk. To paraphrase Peter Drucker, you can’t manage it unless you can measure it. Without metrics, you can’t tell whether management’s actions are making things better or worse. These carbon disclosures are the government’s first step in developing generally accepted sustainability metrics. Just as we have Generally Accepted Accounting Principles (GAAP) for financial reporting, we need principles to guide environmental reporting.
One of the significant impacts of GAAP on organizational management is the increased importance of financial controls within an organization and the increased power and authority of the Chief Financial Officer (CFO). The need to report financial results and the requirements of audits often lead to more careful management of an organization’s financial resources. This in turn would reduce or at least clarify the financial risk for investors. The same attention and effort that is given to financial control systems needs to be applied to environmental control systems. The risk of a catastrophic derailment in East Palestine, Ohio, has become more prominent within Norfolk Southern Railroad under rules requiring disclosure of environmental risks. While carbon disclosure rules will not affect the East Palestine disaster, potential environmental impacts will receive greater attention in internal organizational decision-making as carbon disclosures evolve into environmental disclosures. This will lead to more resources being devoted to reducing environmental risks and reducing environmental disasters.
I believe that on this more crowded planet with a globally interdependent world economy, we need to do a better job of reducing the environmental impact of economic production while to grow Economic production to maintain and improve quality of life. This requires greater care and precision in the production and consumption of goods and services. Companies go to the public market to raise capital. The need to regulate this market to provide investors with information about risks provides a very powerful tool for reducing environmental damage. Underperforming companies, unable to attract capital, either fold or are acquired by better-performing organizations and hope to transform by adapting to the new owner’s standards. Given the growth in environmental risk, it is appropriate to add environmental performance and risk to a company’s risk equation.
There are many ways to influence organizational behavior. Command-and-control regulations, tax incentives, and subsidies to producers and consumers are traditional ways for governments to influence private companies. But the disclosure of organizational performance data—financial and now environmental—has long-term implications for organizational behaviour, because internal organizational capacity must be developed to manage reporting. Students in the Environmental Science and Policy and Sustainability Management MSc programs I supervise have found work integrating environmental sustainability into everyday organizational decision-making. Their ability to integrate their understanding of management and economics with the physical dimensions of environmental sustainability will increase demand for their services under new SEC rules. The faculty and staff I work with go to great lengths to ensure that our programs are constantly evolving to keep our students informed about the changing regulatory environment. I hope that colleagues at other universities dedicated to educating sustainability professionals are doing what we are doing. The planet needs the expertise of educated sustainability professionals.
