Why should consumers care about new climate rules?

The theme of Earth Day 2022, which we celebrated last Friday, was “Invest in the Earth,” which reflects the need for investors and consumers alike to allocate their dollars wisely in the fight against climate change and the race to preserve the Earth’s fleeting resources. For climate-conscious consumers (particularly my fellow Gen Zers), however, figuring out just how to invest in the earth is a lot trickier than deciding to do so. New climate rules that have dropped in the last few weeks may actually make that a bit easier.

Last week, as reported in Fast Company, corporate social responsibility nonprofit As You Sow published a ranking of the largest companies in the United States, grading each company on its progress towards net-zero emissions targets. The report’s key takeaway was that out of the 55 companies ranked, only 3 scored an A on their progress towards their net-zero goals: Microsoft, PepsiCo, and EcoLab. Meanwhile, forty-six of the companies surveyed received a failing grade for their emissions reduction efforts, meaning while each of these companies have made some kind of net-zero emissions goal, they have not made much progress towards said goal (i.e. actually reducing emissions). The credibility of these corporate net-zero goals is critical to enabling the global economy to keep global temperature rise to <1.5℃ compared to pre-industrial levels, mitigating the worst effects of climate change.

As You Sow’s report should not be all that surprising to anyone familiar with the widespread misrepresentation of ESG efforts by corporations, which is so rampant that regulators and commentators came up with a name for it: greenwashing. Greenwashing, roughly speaking, is the conveying of misleading or purely false information about how environmentally friendly a company’s products, services, or business practices are. Take, for example, Disney, which has made an aggressive pledge to get to net-zero emissions by 2030. Their corporate whitepaper on environmental responsibility includes commitments to invest in renewable electricity, produce low-impact seafood, and get rid of those pesky plastic straws, all to get to net-zero in just under a decade. Most anyone could agree that this is an ambitious, commendable goal, and consumers probably couldn’t be faulted for considering Disney an environmentally friendly company. Disney, though, scored a D- on As You Sow’s ranking, a grade that would probably make even Donald Duck blush. The discrepancy begs the question of who to trust, both for Disney’s customers and for activist-minded investors in the company.

Disney’s net-zero commitments (Photo courtesy of Disney)

Enter the SEC. For those new to the space, the US Securities and Exchange Commission (SEC) is a federal regulatory agency that protects investors by enforcing securities laws, maintaining fair markets, and facilitating the sharing of capital information. A couple weeks ago, the SEC dropped a proposal on mandatory climate disclosures, the first of its kind in the US federal government. The SEC’s proposed rules would require all publicly traded companies to calculate and disclose their emissions as early as next year. They are heavily based on a disclosure framework created by the Taskforce on Climate-Related Disclosures (TCFD), which recommends that companies make specific disclosures about their climate-related targets, governance processes and strategies for managing climate-related risks, and current emissions figures. The SEC is not alone in pushing for transparency in climate disclosures: the EU and the UK have begun rolling out TCFD-based rules of their own, called the CSRD and CRFD, respectively.

The SEC’s proposal is strictly focused on providing investors the information they need about companies’ climate-related financial risks. But the rules are likely to have positive knock-on effects. To most consumers, this alphabet soup of regulations trying to mitigate climate change is mind-numbing–the SEC proposal alone is 500+ pages long. But when considered against the backdrop of reports like As You Sow’s, the importance of these rules is clear. Mandatory climate disclosure can provide clarity not only for investors looking to make decisions about allocating capital to climate-friendly companies, but also for consumers looking to vote for climate action with their dollars.

Climate disclosure rules are particularly relevant for younger consumers (looking at you, fellow Gen Zers), who have been shown to be much more concerned with sustainable practices when shopping than even their millennial counterparts. Younger consumers’ prioritization of environmental concerns when shopping makes them an important force in the fight to reduce corporate emissions, but it also makes them more vulnerable to corporate greenwashing. Retailers vying for market share among younger consumers have begun using environmental messaging in their marketing without having to necessarily disclose the full scope of their environmental impact to regulators.

One example is the popular sneaker company Allbirds–all the rage in Silicon Valley-adjacent circles–which markets itself as producing environmentally sustainable sneakers with a low carbon footprint. Allbirds just partnered with Adidas to produce the “2.94kg CO2e” sneaker, so named for being the most environmentally friendly sneaker either brand has created. A few months ago, however, Allbirds came under fire for a lawsuit claiming its eco-friendly advertising was deceptive to consumers. The lawsuit notes that while Allbirds “life cycle assessment tool” tracks its direct emissions in the manufacturing of its popular sneakers, it conveniently neglects the indirect emissions that factor into the sneaker creation process, like land and water use for wool production.

Allbirds now displays carbon footprints calculated for all its shoes. But how believable are they? (Photo courtesy of Stylus)

The Allbirds lawsuit’s claim is actually a key feature of the SEC proposal, which would mandate disclosure not only of direct (Scope 1 and Scope 2) emissions, which a lot of companies already report, but also indirect (Scope 3) emissions, which cover items like transportation, materials, and other items up and down a company’s value chain. As You Sow’s report makes a similar point, which is that although a lot of companies have emissions reduction goals, those goals a) are not reported in a standardized way, b) often do not align with Science-Based Targets for limiting global warming to 1.5℃, and/or c) do not include both direct and indirect emissions.

Returning to our Disney example, the SEC proposed rules would require disclosure of Disney’s Scope 1 emissions from direct operations of its facilities, Scope 2 emissions from heating, cooling, and electricity, and indirect Scope 3 emissions from its whole value chain–suppliers, vendors, transportation, franchises, real estate, and emissions along its products’ life cycles. These rules and similar rules around the world, if passed, could enable not only investors but also consumers to make informed decisions about sustainable purchasing by providing a standardized way to compare and grade companies on their ESG practices without relying on greenwashed marketing tactics.

My climate top 5 for the week:

#1: Science-Based Targets Initiative released a proposal for net-zero standards for financial institutions. Building off its widely utilized and referenced Science-Based Targets for corporations, the SBTi’s newly proposed standards would provide detailed guidance for hedge funds, VC / PE firms, and other financial institutions to align their investing and lending practices with net-zero targets and a 1.5°C temperature increase pathway for global warming. The rules focus on financed emissions, which are emissions of the portfolios of financial institutions. The sooner we have financial institutions committing to reduce the emissions of their investing and lending, the sooner we can redirect capital to a low-carbon economy.

#2: Twitter banned ads that deny the science on climate change, bucketing it into the platform’s disinformation category. “Ads shouldn’t detract from important conversations about the climate crisis,” the company remarked in an Earth Day statement that decried the monetization of climate denial. The announcement follows a similar policy held by Google prohibiting ads that contradict the “well-established scientific consensus” on climate change’s existence.

#3: Xprize’s $100 million competition to fund carbon removal projects has selected its first winners. The carbon removal competition, funded by a $100m donation from Elon Musk, selected a total of 15 teams from 9 countries to receive $1 million awards by moving to the next stage of the competition. They include startups and university projects working on everything from removing carbon dioxide from the air using calcium hydroxide to carbon extraction through seaweed mariculture.

#4: California broke ground on Earth Day on a massive new “wildlife corridor”, the largest in the world, located in Los Angeles. The Wallis Annenberg Wildlife Crossing will be a ten lane-long pathway that allows wildlife to safely cross a highway near Los Angeles, reducing the risk of animal and human harm from animal crossings and reuniting habitats previously isolated by the massive Route 101. Species benefited by the wildlife corridor upon completion will include bobcats, coyotes, rabbits, and specially protected cougars.

#5: An unprecedented tropical storm claimed more than 400 lives in South Africa from flooding last week. Floods overwhelmed the drainage and housing infrastructure of the South African province of KwaZulu-Natal, trapping families in submerged homes as the region endured a year’s worth of rain in 48 hours. South African President Cyril Ramaphosa called the historic storms a byproduct of the climate emergency and emphasized the need for urgent action to mitigate the risk of more frequent extreme weather events.

And to close it out, my Climate Content of the Week:

On the Disney note…so you mean this song didn’t solve climate change?