Carbon4 Finance response to the SEC’s Public Consultation on Climate Change Disclosures

23 June 2021


Carbon4 Finance welcomes the opportunity to provide feedback on the Securities and Exchange Commission’s (SEC’s) request for public input on climate-related financial disclosures. As specialists in the low-carbon transition, we applaud SEC’s growing interest for climate change-related challenges, and we strongly support the development of sustainability disclosures to equip investors in their investment decisions.

Greenhouse gases emissions linked to human activity will induce a climate change that experts agree will have major consequences on our economy and society. Knowledge of exposure to these risks but also to potential opportunities related to climate change is therefore an issue at stake for investors, for the future of financial performances and its preservation.

It is undeniable that climate change poses a systemic risk to financial investments. Investors need to assess and monitor physical risks and transition risks, and the assessment and measure of these risks are based on company disclosures. Back in 2015, the landmark Paris Climate Agreement identified and encouraged ESG disclosures as a key tool to support the low-carbon transition.

In this context, reliable disclosures of risks, financial impacts, and opportunities related to climate change is crucial as to inform investors for decision-making purposes. Climate change mandatory reporting provides an initial quantitative assessment of each company’s climate data and its related challenges, an understanding of their carbon performances related to benchmarks, and whether they are aligned with international objectives in the fight against climate change. A real-world example comes from France, where the implementation of climate change reporting for large companies provided investors with the tools to activate financing towards companies tackling climate change. It is therefore key for investors, regulators and data providers to access differentiating data as to understand a company’s awareness of its climate change impact. With future sustainable disclosures from the SEC, investors will own the appropriate tool to become actor in the climate transition.

About Carbon4 Finance

Created in 2016, Carbon4 Finance (C4F) provides institutional investors with comprehensive and reliable climate data to assess the climate risks and opportunities of their investment portfolios and build environmental investment strategies. Our clients are asset managers, asset owners, banks and index providers willing to report their climate performances or develop climate investment tools and policies based on custom climate data solutions.

Carbon4 Finance offers a complete analysis of climate risks:

• A bottom-up analysis that goes beyond sectoral analysis, enabling the identification of the climate-related best performing companies within each sector;

• An exhaustive analysis of the carbon footprint, identifying both risks and opportunities, including the calculation of induced emissions and emissions savings (scope 1, 2 and scope 3 emissions upstream and downstream).

Carbon4 Finance climate methodologies build on the 13 years of experience of our consulting entity Carbone 4, in performing life-cycle GHG assessments. These methodologies were designed by consulting engineers, specialized by economic sector. Carbone 4’s co-founder Jean-Marc Jancovici developed the Bilan Carbone® (known as Carbon Footprint) method for the ADEME, reference accounting methodology in France which went on to influence international standards. Carbone 4 strongly contributed to the working group for the ISO 14069 and associated guide which specifies rules for GHG emissions accounting. Carbone 4 was also involved in the Finance for Tomorrow working group to support the construction of the 50 ClimActs launched on the One Planet Summit in December 2017. Finally, Carbon4 Finance is represented among the TEG (Technical Expert Group) of the EU that is establishing EU-wide standards on green taxonomy.

In our recent reports on the Oil & Gas1 and Power2 sectors, Carbon4 Finance analyzed companies’ degree of exposure to transition risk, observed the historical trends of their absolute emissions (Scope 1, 2 and 3), and assessed the strategies activated to align with the global objective of decarbonizing the economy. These results where collected based on CIA (Carbon Impact Analytics)3 analysis campaigns conducted in 2020 and measured the exposure of companies to transition risk via an overall rating (from A+ to E-) and various sectoral indicators. We believe these results may guide the Commission in assessing the materiality of climate-related disclosures related to the Oil & Gas and Power sectors. Those reports are enclosed to this Public Consultation feedback.

Besides climate data, Carbon4 Finance together with CDC Biodiversité (French actor on biodiversity protection), will launch the Biodiversity Impact Analytics (BIA) Database powered by the GBS®. Combining experiences on climate data and biodiversity footprint methodology, this database will allow investors to assess the impact on biodiversity of their portfolio with a large coverage in terms of assets and markets. 

As providers of climate risk data for the financial sector, we welcome the opportunity to provide our input on the selected questions below.

Public consultation response

Question 1

How can the Commission best regulate, monitor, review, and guide climate change disclosures in order to provide more consistent, comparable, and reliable information for investors while also providing greater clarity to registrants as to what is expected of them? Where and how should such disclosures be provided? Should any such disclosures be included in annual reports, other periodic filings, or otherwise be furnished?

We strongly support the Commission’s willingness to enhance reporting guidelines as to provide more consistent, comparable and reliable information for investors. As we mentioned earlier, investors need to access actionable climate data, as climate change poses a systemic risk to financial investments.

Question 2

What information related to climate risks can be quantified and measured?  How are markets currently using quantified information? Are there specific metrics on which all registrants should report (such as, for example, scopes 1, 2, and 3 greenhouse gas emissions, and greenhouse gas reduction goals)? What quantified and measured information or metrics should be disclosed because it may be material to an investment or voting decision?  Should disclosures be tiered or scaled based on the size and/or type of registrant)? If so, how? Should disclosures be phased in over time? If so, how? How are markets evaluating and pricing externalities of contributions to climate change? Do climate change related impacts affect the cost of capital, and if so, how and in what ways? How have registrants or investors analyzed risks and costs associated with climate change? What are registrants doing internally to evaluate or project climate scenarios, and what information from or about such internal evaluations should be disclosed to investors to inform investment and voting decisions? How does the absence or presence of robust carbon markets impact firms’ analysis of the risks and costs associated with climate change?

In accordance with Marc Carney’s discourse on the “Tragedy of the horizon”, three main climate risks categories are identified: transition risks, physical risks and liability risks. In terms of disclosure, we believe both transition and physical risks should be evaluated by the Commission.

Climate transition risks are the risks involved with the adjustment process towards a low carbon economy (regulatory development, technological breakthrough, etc.). As to enable an energy transition, it is necessary to shift away from carbon-intensive investments and to mitigate climate change. Beyond the carbon footprint, it is essential to consider the capacity of a company to contribute to the energy and climate transition.

We identify several metrics which registrants should report on as to enable investors embedding transition risks in their investment strategy.

First, reporting should contain induced emissions, comprising the Scope 1, Scope 2 and Scope 3 emissions most material to their activities, by business segment. All scopes’ consistency should be transparent, and calculation methodology should be subject to comprehensive explanations. Historical data should be reported as to comprehend the registrant’s ability to reduce its emissions over time. As activity data is key as to back up the emissions reported by companies, physical data on energy consumption would provide higher granularity and consistency of data.

Focusing on emissions savings, it is a climate metric which we believe the Commission should carefully assess, as it helps investors to steer investments towards solutions for a decarbonized economy. Today, the climate impact of companies is assessed through a static indicator: the carbon intensity, which measures, at a given moment, a company’s carbon emissions. To achieve the 2° C target of the Paris Climate Agreement, it is also necessary to look at the reality of a company’s strategic and financial commitment to a low carbon transition. A metric providing the means to quantity this commitment is the “carbon emission savings” indicator, which was developed by Carbon4 Finance, and successfully applied by investors, i.e., our clients, in their sustainable investment strategy.

Emissions savings are calculated by adding up the “avoided emissions” (comparing the company to the trajectory of its sector) and the “reduced emissions” of a company (comparing the company with itself over 5 years):

avoided emissions are the emissions that are avoided by the company’s products and services; they are calculated by comparing the emissions with a sectorial baseline scenario (i.e. an IEA scenario 2°), or with the substitution by low-carbon solutions. A company avoids emissions if there is a positive gain between the induced emissions of the company on the one hand, and the baseline sectoral emissions scenario on the other hand.

reduced emissions are the volume of emissions lowered through a process efficiency over time: an emission reduction is a real decrease of the company’s carbon intensity over 5 years.

The “emission savings” indicator is key to understand the real impact of a company. This indicator is a powerful tool as to identify companies that have already entered the climate transition and to measure the companies’ action for the low carbon transition, providing figures that are more meaningful and tangible than all the companies statements that claim carbon neutrality.

While induced and emissions savings can be used to report on a company’s current performance, it is important to have a forward-looking view of the company. Extra-financial disclosures should contain the detailed climate change mitigation strategy of the registrants, with targeted emissions reduction as well as the intermediary actions to achieve the target(s). In accordance with the Paris Climate Agreement, a strategy towards a 2° aligned economy should be set out. Governance and oversight of climate change-related challenges should also be disclosed as to ensure management is involved in the monitoring of the climate change forward-looking strategy. We will further tackle this point in the Question 8.

Lastly, as to demonstrate companies’ willingness to shift their business towards climate change mitigation, they should disclose their investment and R&D in low-carbon projects. It is indeed by reporting low-carbon investments that companies show investors they are equipped with the necessary resources as to mitigate the climate transition risks. Investors need to ensure that issuers align consistent resources as to tackle climate risks. 

The other category of risk which should be addressed in companies’ disclosures, are the physical risks. It represents the exposure and vulnerability of registrants to physical consequences of climate change (see our CRIS Methodology4).

To enable investors to understand and manage company risks and to engage in dialogue with registrants, companies should identify in their reporting acute and chronic climate hazards as well as adaptation strategies to withstand these risks.

Registrants should disclose the geographical area of their activities, and the location of assets in sectors most affected to physical risks. This would provide investors with accurate data as to identify the companies most subject to natural disasters.

Question 4

What are the advantages and disadvantages of establishing different climate change reporting standards for different industries, such as the financial sector, oil and gas, transportation, etc.? How should any such industry-focused standards be developed and implemented?

The challenges arising from climate change vary by economic sector, both in terms of levers for reducing emissions and in terms of innovations. Roughly 80% of worldwide GHG emissions are generated by some sectors, on which climate disclosure efforts should be prioritized.

Sectors to be prioritized in the energy and climate transition

We recommend the SEC to concentrate its efforts on assets that have a material impact on the carbon performance of investee companies.

Carbon4 Finance develops sector-specific indicators and calculation modules to factor in the specificities of each sector. This in-depth assessment of the portfolio constituents covers all operating segments and is based on several operational and company-specific data: production volumes (tons of steel, MWh per source, etc.), production or sales locations, energy efficiency of the process, sources of supply, etc. This operational data is collected from various reports made publicly available by the company (annual, CSR and ESG reports). The disclosure of these consistent, comparable, and reliable data would inform investors on the most material risks to consider for each sector.

The graph below, retrieved from our database, illustrates the breakdown of induced Scope 1&2 and Scope 3 emissions by sector, for the S&P 500 index. It shows that the Commission should first tackle the industries which have a stronger impact on climate change via their Scope 1&2, and Scope 3 emissions.

Question 8

How, if at all, should registrants disclose their internal governance and oversight of climate-related issues? For example, what are the advantages and disadvantages of requiring disclosure concerning the connection between executive or employee compensation and climate change risks and impacts?

As governance on climate change is crucial as to monitor the achievement of related targets, registrants should clearly and transparently define the bodies in charge of tackling climate change starting from the highest-level positions in the management (including the Executive Committee). Companies should define the Board-level oversight and responsibility over carbon performances. Governance on climate change is key for investors as to verify the consistency of reported quantitative data on transition and physical risks. An appropriate governance strengthens a registrant’s capability to address this challenge.

Additionally, registrants should disclose if any (financial) incentives linked to the achievement of climate change-related metrics are provided by the management. With that disclosed information, investors would understand if the achievement of the climate change mitigation strategy is more likely to succeed.

As to raise awareness of individuals within issuers’ entity, disclosure on whether the company encourage employees to pay attention to climate change or provide trainings on that matter should be provided.

Question 14

What climate-related information is available with respect to private companies, and how should the Commission’s rules address private companies’ climate disclosures, such as through exempt offerings, or its oversight of certain investment advisers and funds?

The Commission should address private companies’ disclosures by integrating induced emissions (Scopes 1&2 and Scope 3) as a mandatory metric. Without activity and emissions data, it prevents investors from making an initial quantitative screening on carbon performances, major orders of magnitudes and the associated climate risks as to understand their origin (sector, activities, value chain, location, etc.).

Both private and public companies should be actors in the fight against climate change, which should be demonstrated by appropriate climate change disclosures.


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