A Look at Corporate Climate Action in 2022 Part 1

Corporate climate action is transitioning from a moral cause that lifestyle companies like Patagonia embrace to a regulated part of everyday business. On March 21, the Securities and Exchange Commission (SEC) approved a climate disclosure proposal that would require large companies to report their greenhouse gas emissions among other climate disclosures as soon as 2023. The public had an opportunity to leave comments on the proposal through the summer of 2022, and the SEC hopes to pass it in the second half of 2022. The U.S. trails the EU and UK, both of which already require large companies to report energy and emissions data and are now expanding to ask for more data from more companies in coming years.

In addition to regulation, companies have faced ethical and social pressure from customers, employees, investors, and executive teams and their families to take climate action for years. The SEC estimates that a third of the 7,000 corporate annual reports it reviewed in 2019 and 2020 included climate impact disclosures. Of the companies who haven’t yet made climate disclosures, many are gearing up to do so now as if the SEC proposal already passed.

In order to contextualize this moment in the broader history of climate action and better understand where exactly we stand on the path to better caring for our planet, we interviewed Hilary Vogelbaum, an MIT graduate who works in clean energy investing. We also researched the climate action of specific companies to gain a clearer picture of the current state of corporate climate action, which we will follow up in part two of this article.

Note: Hilary Vogelbaum is not an employee at Credera and the views expressed in the article are her own.

Part 1: Hilary Vogelbaum on the Big Picture of Climate Change

Key Takeaways: Saving the planet requires aligning the markets in a way that incentivizes customers, executives, employees, and shareholders to adopt climate solutions, and the efficient way to do this is through carbon pricing, which first requires carbon accounting. 

How have you seen corporate climate action evolve since you first began working in this field?

I first learned about the idea of corporations playing a role in mitigating climate change around 2012 because of my interest in investigative journalism. Thomas Friedman had written about the climate crisis from an environmental, energy, and geopolitical lens. Attention centered on the energy sector at the time, particularly around the role of oil and gas companies and traditional utilities whose products and operations had been identified as drivers of anthropogenic (i.e., human-caused) climate change. Since then, the biggest change I’ve seen in climate action is the shift from a sole focus on energy players to the rest of the corporate world: clothing, tech, consumer goods, etc.

What do you believe are the greatest driving forces in the climate solution?

Two main things. First, the role of the private markets in deploying and integrating climate solutions. I am a big believer in market-based solutions. Whether or not a company is focused on sustainability, the ultimate business decision to invest in a solution is an economic one, even in the case where consumers agree to pay more for sustainable products.

The second driving force is policy. Clear and aligned policy across every level from federal to local is critically important to getting solutions deployed and ties back into the role of private markets because it guides private investment decisions. The most economically efficient policy is a carbon pricing solution because it prices in the negative externality of carbon emissions and other greenhouse gas emissions. Whether it's politically feasible is another question. The community has called for carbon pricing for a long time but struggled to pass widespread legislation in the U.S.

What role do you see carbon accounting playing in the climate solution?

Carbon accounting and reporting is critically important to integrate a price on carbon into a company’s operations. The first thing you need to know is how much of the externality you are producing. Availability of high-quality data is the base requirement for impact calculations, so having a carbon accounting method to accurately track carbon emissions is critical to set up an organization for success in carbon pricing.

In addition, robust accounting allows for quantification of climate risk within an organization. I’m hopeful about the new SEC climate disclosure proposal creating a clear framework for corporations, investors, and other stakeholders to understand how each organization is quantifying and approaching its climate and financial risk from stranded assets, supply chain disruptions, or increased costs of goods and services.

How have you seen carbon accounting play out in reality?

It's a range. I've seen improvements over time. People are starting to understand scope 1, 2, and 3 emissions, quality metrics for carbon offsets, etc.—things that used to only be known in academic and technical circles. Nonetheless, it is still very challenging for someone to sit in a corporate function and try to calculate emissions across an entire business when they're not in the actual business units seeing the day-to-day operations. If carbon accounting remains an on-paper reporting exercise and not a core part of the work, then it's going to be a challenge to get the data we're looking for.

That said, lots of people are working hard to make carbon accounting easier: consultants, startups, and software solutions. My hope is that there will arise a structure to incentivize individual employees to gather, report, and use this data as part of their day-to-day operation at work.

How do you ultimately see our society solving climate change?

Let’s break it down into the first 85-90% emissions reductions and then the last 10-15%. For the last piece of emissions, it becomes much more difficult to achieve each marginal percent decrease. The first 85-90% is more of a coordination issue than a technology issue—the tech already exists. We need to align the markets to incentivize businesses, consumers, and governments to implement, purchase, and finance climate solutions. For the last 10-15%, we will need technological development in areas such as carbon removal, low-carbon firm power, and nature-based carbon capture solutions.

From a regulatory and policy standpoint, an efficient way to get the first 85-90% of emissions reductions is results-based, technology-agnostic solutions. Rather than saying here's the technology you need, let's ask "What is the result you're looking for?" For example, if I want to decarbonize buildings, I don’t want to make a rule that everyone must install heat pumps. Heat pumps might work in some cases, and in others, they might be too expensive or not make technical sense. Instead, decide on the results you want and come up with your own plan to reach those results in a certain time frame. Maybe you'll decide to install solar panels, or you’ll use smart devices to monitor energy use, or do something else. The technology doesn’t matter, just the results.

What tells you that a company is serious about climate action?

The clearest signals are transparent reporting and financial incentives tied to environmental commitments, which may be compensation-based, dividends-linked, or connected to the board or shareholders. Critically, to ensure people are incentivized to report results accurately, the company must show their methodology for gathering data and calculating the key metrics. The end goal is to have a consistent, reproducible quantification of the company's climate-related financial risk, and ensure it is incentivized to mitigate this risk within the timeframe delineated by internal, governmental, customer, and/or public stakeholders.

Is there hope for saving the planet?

Yes. There are multiple ways to look at the challenge. On the one hand, you can look at it and say, “We’re so far off track, it looks impossible. We’re doomed for massive catastrophes.” On the other hand, when you look at how the world works, there are huge concentrations of power. Most resources are owned by giant private firms or state-controlled companies. Whether that consolidation of power is good or bad is a philosophical question, but it means that things have the capacity to change rapidly.

In more good news, these companies are beginning to recognize that there are natural incentives to take strong action towards creating a sustainable economy. While it is not always obvious to people, climate risk is financial risk. Governments and corporations are working on the climate crisis because the financial, political, and social costs caused by climate change are becoming more apparent. If we can make the financial case more obvious to key stakeholders in governments and large companies, it will catalyze fast and widespread action.

What’s Next

Look out for part two of this article where we dig deeper into climate action of specific companies to understand the current state of corporate climate action. Learn more about Credera or find more of our insights on sustainability here. 

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