In May, the Obama Administration announced new fuel economy standards for cars sold in the US. According to activist Daniel Becker, as quoted in the New York Times, "This is the single biggest step the American government has ever taken to cut greenhouse gas emissions."
More big steps are to come. The EPA has been soliciting public comments for "the first comprehensive national system for reporting emissions of carbon dioxide and other greenhouse gases (GHG) produced by major sources in the United States."
The Social Investment Forum (SIF) has developed a comment letter on the proposed rules. Reporting rules may not seem as momentous as anti-gas-guzzler laws, but the EPA's proposal could remake the energy policies of every industry. By helping investors account for corporations' carbon-related liabilities, SIF argues that disclosure will enhance the "pricing [of] such risks into the valuation of securities."
SIF does note one potential obstacle to this process: While the EPA calls for reporting of emissions by major carbon-emitting facilities, it does not require every corporation to disclose company-wide emissions. This could complicate the work of shareholders, who seek to make informed judgments about corporate exposure to emission-related risks.
90% of Greenhouse Gas Emissions to be Reported
According to an EPA fact sheet:
"The proposed rule calls for suppliers of fossil fuels or industrial greenhouse gases, manufacturers of vehicles and engines, and facilities that emit 25,000 metric tons or more of GHG emissions per year to submit annual reports to EPA…. "85-90% of total national U.S. GHG emissions, from approximately 13,000 facilities, would be covered by the proposed rule. Most small businesses would fall below the 25,000 metric ton threshold and would not be required to report GHG emissions to EPA."
EPA addresses the question of facility vs. company-wide reporting as part of an FAQ on the proposed rule:
"Q: Would EPA collect data at the unit-, facility-, or corporate-wide level? "A: For the majority of reporters, EPA would collect data at the facility level. There are a few exceptions where there would be reporting at the corporate level. The exceptions are vehicle and engine manufacturers, fossil fuel importers and exporters, and local gas distribution companies."
Disclosure Itself is a Regulatory Tool
SIF is careful to note that the "EPA has not proposed to establish a regime that would result in a carbon price." Government-mandated disclosure can still serve a regulatory purpose, however.
Emissions data enable investors to make "distinctions between relative security valuations based on companies' liabilities and regulatory risks," in SIF's words. Relatively high carbon output may indicate that a company is unprepared for a future "cap-and-trade" regime, or for potential spikes in fossil fuel prices.
Investors Buy Companies, Not Facilities
SIF offers a glimpse of how this process works, and why company-wide emissions reporting is important:
"When investors buy equities, they are investing in companies, not facilities. Facility-specific datasets, such as those proposed in this Rule, must have readily identifiable information that allows investors and their research providers to link facilities to the ultimate parent company (the investable entity). With such linkages, investors are able to aggregate information from multiple facilities to represent the company with a single GHG emissions number. …"
If investors could compare equities with a "single GHG emissions number," then the market could more readily price carbon-related risks into current share values. As SIF explains, disclosure could help long-term risk exposure have an immediate material impact:
"Most discussions of materiality, like most things in finance, tend to focus more attention on the short term, and, because of this ingrained myopia, longer-term or persistent issues tend to disappear from view in securities law enforcement and legal proceedings. But habit is not a good reason to perpetuate the situation. We believe that EPA's proposed rule on disclosure of greenhouse gas emissions is a very positive step in the right direction."
For more information, please see:
The EPA fact sheet and FAQ on the new rule
EPA's presentation (pdf) to SIF on the proposed rule
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