The Impact of the SEC Climate Disclosure Rule on Sustainability Education and Management
Despite controversy and complexity, some version of the Security and Exchange Commission’s (SEC’s) nearly 500-page carbon disclosure rule will almost certainly be promulgated this spring. The European Union is on the path to require an even broader disclosure of a publicly traded company’s environmental and social governance actions. This means that corporate managers will need to pay greater attention to the impact of their company on people and the planet. It also means that disclosures that were once voluntary and ill-defined will soon be mandatory and specific.
In Columbia’s Masters of Sustainability Management program, our faculty have been discussing changes in our curriculum needed to respond to this change in our world. In our recent meeting, I asked our faculty to reflect on their courses and update them where appropriate to deal with the changes that the promulgation of the SEC climate rule will bring. We know, for example, that our courses on Corporate Sustainability Reporting, Greenhouse Gas Measurement, Sustainability Finance, and Sustainability Management will need to be updated. I learned that many of our practitioner faculty were already revising their courses since, in their own professional practice, they’ve started to prepare for the SEC and EU rules.
Due to the complexity of the SEC climate rule, we will be offering several new courses to aid interested students in gaining a deeper understanding of the disclosure rules and their probable impact:
- Management of SEC Climate Disclosure Compliance: This course will teach students how to develop the organizational capacity and managerial techniques needed to comply with the new disclosure rules.
- Understanding the SEC Rule: Disclosure Law for Non-Lawyers: This course will be designed to translate the legal aspects of disclosure law to our students who do not have a background in law. It will span topics from voluntary to mandatory disclosures and address both the SEC rule and the EU regulations to prepare students to conceptualize these requirements for multinational, global organizations.
- Scenario Analysis: Risk Identification and Quantification: This course will be designed so that students can apply the concepts they’ve learned about risk and disclosure requirements in specific organizational settings. The course will be case study-based to teach students how to identify and quantify environmental risk and will touch on how to realistically navigate common problems faced when working to operationalize sustainability reporting.
Our faculty are finding that the issues of environmental sustainability, organizational governance transparency, and community impact are becoming more important to routine management in many organizations. We think it important that the sustainability professionals we are educating and graduating be prepared for these changing conditions and be prepared to manage in this evolving environment.
There is some conservative ideological opposition to the SEC rules that I see as reflexive anti-regulation. This is the idea that all regulation is bad for business. If that were true, we wouldn’t need the SEC’s financial disclosure rules or any accountants. Even if one favors the concept of environmental disclosure, there are practical issues of rule definition and management capacity that still must be worked on. These new rules, like all new rules, are not self-implementing. It will take time to put them into practice. Some conservatives consider carbon disclosure some kind of “woke” fever dream, even though most of the impetus for disclosure standards comes from investors.
Currently, over 90% of Standard and Poor’s top 500 companies issue corporate sustainability reports, but the measures used to report corporate sustainability vary widely and are impossible to compare across companies. When FDR created the SEC, he set in motion financial disclosure rules that required publicly traded corporations to adhere to standard definitions of revenues, expenditures, and profits and that those results be audited by firms certified to conduct such audits. That meant that investors could have confidence that they lacked in the 1920s when investing in the stock market resembled betting in a casino. The crash of 1929 was due in part to the absence of financial disclosure rules. Once the SEC started requiring and regulating financial disclosure, investors could be confident that the financial data they saw was real and that they had the information needed to judge the risk of investment. It also meant that investors could compare financial risks across companies.
Carbon disclosure is the first step in government-required reporting on environmental risk. I see this new rule as a foot in the door. The specifics of the rule are less important than the fact of the rule. Just as financial disclosure has evolved over the past decades, so too will environmental disclosure. As we learned in East Palestine, Ohio, a few weeks ago, reckless and incompetent organizational practices can result in catastrophic environmental impacts that, in turn, lead to millions, if not billions, of dollars of financial risk. Investors need to understand these risks. Disclosing environmental risks involves measuring them according to standard definitions. Those standard definitions provide clear measures that organizations can use to manage risk. To paraphrase Peter Drucker, you can’t manage something unless you can measure it. Without measures, you cannot tell if management’s actions are making the situation better or worse. These carbon disclosures are government’s first step in developing generally accepted sustainability metrics. Just as we have generally accepted accounting principles for financial reporting, we need to develop principles to guide environmental reporting.
One of the important impacts of generally accepted accounting principles on organizational management has been to increase the importance of financial controls within organizations and enhance the power and authority of chief financial officers. The need to report financial results and the requirement of audits typically result in more careful management of an organization’s financial resources. This, in turn, has the effect of reducing, or at a minimum clarifying, financial risk for investors. The same care and effort devoted to financial control systems needs to be applied to environmental control systems. The risk that resulted in the catastrophic derailment in East Palestine, Ohio, would have been made more prominent internally in the Norfolk Southern rail firm by rules requiring disclosure of environmental risk. While carbon disclosure rules would not have impacted the East Palestine disaster, as carbon disclosure evolves into environmental disclosure, potential environmental impacts will receive more attention in internal organizational decision-making. That will result in more resources devoted to reducing environmental risk and fewer environmental catastrophes.
I believe that on a 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 growing economic production to maintain and improve quality of life. This requires greater care and precision in the production and consumption of goods and services. Corporations enter the public marketplace to raise capital. The need to regulate that marketplace to provide investors with information about risk provides an incredibly powerful tool to reduce environmental damage. Poorly performing companies cannot attract capital and either die or are purchased by better-performing organizations and hopefully are transformed by needing to accommodate the standards of their new owner. Adding environmental performance and risk to a company’s risk equation is appropriate given the growth of environmental risk.
There are many ways to influence organizational behavior. Command and control regulation, tax benefits, and subsidies to producers and consumers are traditional methods by which government influences private corporations. But disclosure of data on organizational performance—financial and now environmental disclosure—has long-term impacts on organizational behavior due to the internal organizational capacity that must be developed to manage reporting. Students in the Master’s programs I direct in Environmental Science and Policy and in Sustainability Management have already found employment bringing environmental sustainability into routine organizational decision-making. With the new SEC rule, their ability to combine their understanding of management and economics with the physical dimensions of environmental sustainability will increase the demand for their services. The faculty I work with have every intention of ensuring that our curriculum evolves to keep our students current on the changing regulatory environment. My hope is that colleagues at other universities working to educate sustainability professionals are doing exactly what we are doing. The planet needs the expertise of well-educated sustainability professionals.