Comment on the U.S. Environmental Protection Agency Proposed Rule
on the Mandatory Reporting of Greenhouse Gases
Docket ID No. EPA-HQ-OAR-2008-0508
I. Introduction
The Social Investment Forum (www.socialinvest.org), the U.S. national nonprofit membership association for professionals, firms and organizations dedicated to advancing the practice and growth of socially responsible investing, is pleased to have the opportunity to comment on the U.S. Environmental Protection Agency proposal for a mandatory greenhouse gas (GHG) emission reporting rule. We welcome the proposed rule as a critical first step in managing and eventually curbing U.S. greenhouse gas emissions; we believe that the rule, especially with certain modifications we are proposing, could greatly assist investors in assessing the climate-related risk of portfolio companies.
A. Background on the Social Investment Forum and socially responsible investing
The approximately 400 members of the Social Investment Forum (SIF) include investment management and advisory firms, mutual fund companies, research firms, financial planners and advisors, brokers-dealers, banks, credit unions, community development organizations, non-profit associations, and pension funds, foundations and other asset owners.
SIF and its members believe responsible investment practice requires the consideration of environmental, social and corporate governance criteria in addition to standard financial analysis. Forum members support socially responsible investing (SRI) through portfolio selection analysis, shareholder advocacy and community investing.
More specifically, socially responsible or sustainable investors use capital to promote responsible corporate governance, to improve corporate disclosure and accountability, to address corporate environmental and social shortcomings—from outsized carbon footprints to human rights violations in the global supply chain, and to support community investing institutions that strengthen low-income communities through access to capital. SRI investors seek to enhance the bottom lines of companies and to deliver sustained long-term wealth to shareholders.
SIF is proud to represent the community that was talking about climate change before it became a widely accepted risk, that has long sounded the warnings about socially irresponsible business practices here and abroad; and that for decades has responsibly and successfully loaned money to low-income communities—without the record foreclosures precipitated by the predatory lending of the last several years.
In January 2009, SIF released an open letter to the Obama administration in which we urged, among other things, that the Securities and Exchange Commission require publicly traded companies to report on environmental, social and governance issues that, if not managed properly, can harm shareholder value and public welfare. (See https://www.socialinvest.org/pdf/Obama_Policy_Pri_2009.pdf.)
Though the SEC requires disclosure of financially material issues, to date this requirement has not been enforced when it comes to reporting on environmental and social issues that may pose significant risks and therefore have material financial impact. In addition, we believe the financial materiality standard is insufficient to ensure regular and consistent disclosure of long-term social and environmental risks. In our experience, many of these risks are inherently long-term and difficult to address in a short time frame. Most discussions of materiality tend to focus more attention on the short term, and because of this, longer-term or persistent issues tend to disappear from view in securities law enforcement and legal proceedings. We believe that EPA’s proposed rule on disclosure of greenhouse gas emissions is a very positive step in reversing this short-term view.
B. The business case for GHG emissions and climate risk disclosure.
We believe that climate change is a long-term environmental risk that will have material financial impact for many companies. At this moment, and to an even greater extent in the future, companies face competitive, physical, regulatory, supply chain, reputational and legal risks as a result of climate change. In general, the disclosure companies currently provide does not provide the information that investors need about how companies assess and manage these risks.
Over the past few years, financial markets have gone from largely ignoring climate-related risks to routinely pricing such risks into the valuation of securities (stocks, bonds, and other financial products). DB Advisors, for example, notes in a February 2009 report that “pricing the carbon externality via cap-and-trade or carbon taxes increases the valuation of ‘clean’ businesses.”(1) By extension, the relative values of companies with high GHG emissions are depressed. DB also stresses the value of regulation in helping to level the playing field and provide the proper incentives for business, which accounts for nearly half of all emissions, to help avoid reaching GHG concentrations that are widely regarded by scientists as tipping points for catastrophic effects. A 2008 report from DB states,
The aim must be to create a clear long-term regulatory regime that determines a market-driven cost of carbon while at the same time encouraging the development of alternatives. If governments recognize the necessity of creating the right regulatory environment, investors will recognize the opportunity and step in.
There are numerous examples of governments already heading in the right direction. The recent renewal of the Production Tax Credit and Investment Tax Credit in the US assured solar and wind energy the regulatory certainty and proper incentives for continued development of the sector. And one need only look to Germany’s Renewable Energy Sources Act for an example of true commitment to climate change mitigation. Germany has created a friendly environment for renewable energies to power up and connect to the grid through its system of feed-in tariffs and transparent and enforceable policies for renewable development. Any successful regulatory frameworks must have these clear, comprehensive procedures to incentivize industry and create capital formation over the longer term.
Achieving this kind of regulatory consistency on a global scale is a massive project, of course. But the world cannot wait. The potential economic, social and political upheavals that could result from a failure to tackle carbon emissions may be irrevocable. Severe though it is, the current financial crisis can eventually be fixed, and should not be used as an excuse for inaction.(2)
We recognize that EPA has not proposed to establish a regime that would result in a carbon price. However, the proposal for mandatory reporting establishes the crucial information infrastructure that an emissions-limitation regime would depend on, and that the finance and investment community will find invaluable in making distinctions between relative security valuations based on companies’ liabilities and regulatory risks. Moreover, there is also ample evidence that disclosure alone can be an effective regulatory mechanism: The establishment of reporting, under the Emergency Planning and Community Right to Know Act, of substances covered by the Toxic Release Inventory was an important step, and many observers agree that reporting alone provides some incentive for emissions reduction. A 2005 academic study states, “Public release of [TRI data] and increased public scrutiny are believed to significantly contribute to the over 45% reduction in toxic chemical releases since inception of the program and to growing support for this type of informational regulation…”(3) Corporations are increasingly likely to recognize that reducing environmental impacts (and therefore liabilities) has financial value, and that silence on the subject will increasingly be seen as a liability. The foundation of efficient financial markets is information, and as the world grows more aware of the implications of climate change, this information will be increasingly valuable. Moreover, for financial markets, improved reporting is crucial.(4)
Another source of climate-change related risk is litigation. JP Morgan states that the lawsuits, growing in number, that attempt to hold companies liable for greenhouse gas emissions “have implications for equity and credit investors in utilities, manufacturers, energy and transportation companies, and insurers.”(5) While the JP Morgan report concluded that plaintiffs were unlikely to be awarded monetary damages in lawsuits over responsibility for climate change, the corporate defendants did face reputational and headline risks from such litigation. A Marsh survey in 2000 disclosed that 85% of firms regarded their brands to be their most important assets.(6)
Disclosure is the first step in creating a regime in which there are appropriate incentives for companies to reduce emissions and make their use of energy cleaner and more efficient. While full disclosure of emissions will mean that some firms—especially those not measuring or aware of emissions now—will need to invest in tracking and reporting systems, that investment is quite likely to pay off as more and more nations establish regimes regulating greenhouse gas emissions. A recent Economist survey showed that “a majority of companies favor more environmental regulations—provided there is a level playing field.”(7)
Moreover, access to robust data on greenhouse gas emissions enhances the ability of SIF members and other investors to apply their own analyses and models to the risks associated with individual company operations.
For full comments, please visit http://www.socialinvest.org/resources/factsheets_resources/documents/GHGReportingRuleComment.pdf