Why the SEC's Rule Matters for ESG

Better measurement = Better results

The Securities and Exchange Commission (SEC) has decided to impose new climate risk and GHG reporting requirements on publicly traded companies. They reason that shareholders will benefit from understanding how companies plan to confront climate risks and that the planet will benefit from the additional transparency and action enabled by these disclosures.

This ruling also offers a chance for the ESG industry to redeem itself. Greenwashing abounds in the dizzying array of carbon offsets and climate-friendly ETFs now being peddled as a panacea for the continuation of business as usual. We can do better.

The best way to make sure that these requirements have their intended effects is to eliminate as many legacy poor practices as possible. For example, the most common way to calculate GHG emissions from the grid today is to assign an “average” emissions value. ESG analysts do this by picking a value that represents the blend of all the different sources of energy (i.e., coal, gas, wind, solar, etc.) and averaging it all out over the course of a year. Then they take the annual energy use of a building and multiply it by that average emission value. This number is heroically wrong in most cases, but if you know what you are doing, it can be very effective at making a dirty company look clean.

We can eliminate some of this obfuscation by moving GHG carbon accounting into the 21st century. Just as 24/7 Carbon-Free Energy is now gaining steam, measurement of GHG emissions on a 24/7 basis is also now possible. We have the data we need to capture the emissions from the grid on an hourly basis. All that needs to be done is to measure the hourly energy use from a building and you can get a much more accurate estimate of emissions.

Calculating actual carbon emissions is particularly important for the deployment of renewable energy. As we build more solar and wind, the grid will increasingly be free of carbon emissions during the times of day in which those resources are generating energy. Companies can do their part by purchasing power directly from renewable energy developers and by shifting their demand to the times of day in which the grid is cleaner.

Optimistically, the SEC’s disclosure rules will upend the ESG industry. The big consultancy shops that generate mammoth PDFs will need to figure out how to serve the practical needs of decarbonization and companies that hide behind false metrics will need to take real responsibility for their role in maintaining shareholder value amidst the turbulent transition to a clean energy future.