The promise and peril of SEC climate rules

I took time yesterday to read much of the SEC’s 510-page proposal on climate disclosure, and I reached out to a few trusted CEOs who are knowledgeable on the subject. My conclusion: the SEC did the right thing and for the right reasons. 

First, investors want this. A sizable minority—if not yet a majority—have made sustainability part of their investment strategies. They need good information to act on. Second, many large companies are already providing this information. Again, a sizable minority—if not yet a majority—have committed to “net zero” goals. Even if the future effects of climate change on those companies are uncertain, the costs of the climate transition implied in their net zero commitments are not. Investors deserve to know. And existing disclosures suffer from a “pick your metric” problem. They are neither “consistent, comparable nor reliable,” as the SEC correctly points out. Some standards are needed.

Some business groups object to the SEC’s decision to include Scope 3 emissions—those that come from a company’s suppliers and users. And not without cause: Scope 3 emissions are tricky to calculate and trickier to control. But Scope 3 is where much of the problem lies and also where the magic can happen. As big companies increasingly nudge suppliers to meet measurable standards, their actions have a snowballing effect. Free riders are forced to fall in line or lose business. Leave Scope 3 out, and the free riders have free reign and companies can meet climate goals by simply outsourcing the dirty stuff.

The peril of the proposal is this: By making disclosure a government mandate, the SEC risks turning a meaningful corporate movement into another polarized political debate. One party—dominated by climate deniers and resisters—is already attacking the agency for “overreach,” while the other—led by those who seem to think fossil fuels can be banished tomorrow—is complaining the SEC didn’t go far enough. Many practical business leaders are looking for stable middle ground. But the middle ground has become a tar pit in Washington.

Meanwhile, one group clearly benefits from the SEC rule: business service companies hoping to help others calculate their carbon emissions. Yesterday, Boston Consulting Group and SAP announced a new partnership to integrate BCG’s carbon tracking and measurement tool (CO2 AI) into SAP’s core business technology systems. I spoke recently with BCG CEO Christoph Schweizer, who told me sustainability has become “a number one or two” topic for most of the large companies BCG serves. He added: “We want to make a positive difference in the world. The generation of people we attract into BCG, they want to work on climate and sustainability. It’s an incredibly important tool for attracting talent.”

More news below.

Alan Murray
@alansmurray
alan.murray@fortune.com

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This edition of CEO Daily was edited by David Meyer.