What we're reading about, 3/8/24

Climate, energy, and sustainability coverage we've been following around the web

(1) The SEC’s new climate-related disclosure rules came out on Wednesday. In the words of SEC chair Gary Gensler (emphasis mine):

“These final rules build on past requirements by mandating material climate risk disclosures by public companies and in public offerings. The rules will provide investors with consistent, comparable, and decision-useful information, and issuers with clear reporting requirements. Further, they will provide specificity on what companies must disclose, which will produce more useful information than what investors see today. They will also require that climate risk disclosures be included in a company’s SEC filings, such as annual reports and registration statements rather than on company websites, which will help make them more reliable.”

Currently, climate-related disclosures such as annual GHG emissions or energy usage are voluntary. Although many public companies already disclose climate-related metrics, they are typically found in standalone sustainability reports or questionnaires submitted to CDP. And, until now, there was no universal standard on what climate data US-listed companies should actually disclose, though voluntary standards like SASB and the TCFD framework have been widely adopted by issuers and endorsed by the biggest asset managers. For example, 86 percent of companies in the S&P 500 disclosed climate data to the CDP in 2023.

Unfortunately, who needs to report Scope 1 and Scope 2 emissions under these new rules still isn’t black and white. That’s because most climate-related disclosures will be mandatory if they are considered financially “material,” which gives companies leeway in deciding whether they need to disclose the data. Younger, smaller companies with less onerous reporting requirements (“emerging growth companies” and “smaller reporting companies” in SEC-speak) will be exempt from emissions reporting.

In addition to material emissions, companies will also have to quantify how much they are spending to achieve their climate-related targets and goals, and costs related to carbon offsets and clean energy credits, if those are a big part of how they hope to achieve their climate goals.

The other big unsung change is that the new rules require companies to report all this data on Form 10-K, the annual report that public companies file with the SEC. This is sort of huge? Most ESG reports come out in the summer and fall. Including climate data on Form 10-K will require companies to speed up their reporting by at least 3-6 months. It will also give activists and analysts material climate information in time for proxy season, the period from roughly April to June when companies hold annual meetings and investors vote on shareholder proposals.

Despite the fuzzy definition of materiality, many companies will likely play it safe and disclose, BNEF sustainable finance analyst Jameson McLellan told Heatmap. Additionally, most major US companies do business in California and Europe, jurisdictions under which companies will soon be held to stricter climate disclosure requirements.

As we’ve highlighted before, the SEC’s new guidelines do not include customer and supplier emissions (“Scope 3”), which are thought to comprise ~70 percent of public companies’ emissions, on average, but are notoriously tricky to calculate. 

According to the Washington Post, Gensler likely dropped the scope 3 requirement as part of an effort to craft a set of rules that can withstand legal challenges. The new rules are already getting heat from Republican politicians and energy lobbying groups, and are likely to be challenged in court.

(2) JP Morgan reached an an agreement with the New York City Comptroller’s Office on a climate-related shareholder resolution it filed on behalf of three NYC pension funds. The proposal requests target companies to disclose a “Clean Energy Supply Financing Ratio” (CESFR?) equal to the total amount of funding for low-carbon energy projects that JP Morgan facilitates through balance-sheet lending and debt and equity underwriting, divided by the total amount of financing for both clean and fossil energy. The metric is supposed to give investors a picture of whether the bank is financing an increasing ratio of low-carbon to fossil-fuel projects and companies over time.

JP Morgan agreed to publish the ratio:

“We found common ground with the NYC Comptroller on disclosing a clean energy financing ratio with an understanding that it is going to take us some time and resources to develop a decision useful approach.”

The Comptroller’s Office made similar proposals ahead of the annual meetings at Morgan Stanley, Goldman Sachs, Citigroup, and Bank of America.

(3) Cornell professor Robert Howarth’s paper on the lifecycle emissions of liquefied natural gas (LNG) caught a lot of attention recently (including ours). Howarth finds that whether LNG is a lower-emission alternative to coal turns on the level of methane emissions on the gas’s journey from well to tanker to power plant. Per Bloomberg:

“To have a lower warming impact than coal, only a minuscule amount of methane — the primary component of fossil gas — can leak as it moves through vast global supply chains that often begin at wellheads in the scrublands of Texas and Oklahoma and span thousands of miles across oceans, to furnaces and power stations in cities from Shanghai to Hamburg.”

Howarth’s study, which is still in peer review, gained attention because his findings suggested that methane leaks from the LNG production and distribution process could have a more significant climate impact than previously thought.

In 2011, Howarth published a paper estimating that between 3.6% and 7.9% of fracked shale gas in the US was being lost through flaring, venting, and leaks - so-called “fugitive” emissions, because they represent methane escaping into the atmosphere without even being burned for fuel. That paper also received pushback from politicians and energy industry groups. More recently, Howarth published updated estimates in 2022 that found, on average, that 2.6% of gas was being lost as upstream and midstream “fugitive emissions.”

(4) ExxonMobil escalated its conflict with Chevron over the pending acquisition of Hess, which owns a 30 percent interest in a valuable oil and gas project Exxon operates off the coast of Guyana. Exxon has filed for arbitration by the International Chamber of Commerce in Paris. The dispute between the two supermajors boils down to the terms of a joint operating agreement (JOA) signed between Shell and Exxon over twenty years ago (inherited by Hess when it purchased Shell’s stake). Some JOAs allow partners a right-of-first-refusal (ROFR) when one partner wants to sell their stake. As Matt Levine framed it in an excellent Money Stuff column yesterday, the question is whether the Hess acquisition counts as a transfer or sale of the stake, which would trigger Exxon’s ROFR.

Further Reading:

• The One Big Change to the SEC’s Climate Rule (Heatmap)

• New rules will force U.S. firms to divulge role in warming the planet (Washington Post) 

• SEC will require companies to disclose emissions, with one glaring gap (Grist)

• S.E.C. Approves New Climate Rules Far Weaker Than Originally Proposed (New York Times)

• SEC Scales Back New Pollution-Disclosure Rules for Companies (Bloomberg) 

• Climate Rules Reach Finish Line, in Weakened Form, as Biden Races Clock (Inside Climate News) 

• Biden Just Caved on a Bunch of Climate Rules. Or Did He? (Heatmap) 

• ​​Why the SEC’s New Climate Rules Matter (Heatmap) 

• Jamie Dimon takes a stand by signing JPMorgan up as the first big bank to reveal a key clean energy metric to investors (Fortune)

• How One Methane Scientist Influenced Biden’s Pause on LNG Approvals (Bloomberg)

• Exxon Files for Arbitration Over Chevron’s Deal for Hess (WSJ)