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The SEC has spoken. Now, what does it mean for business? Part 1 of 3
Sustainability

The SEC has spoken. Now, what does it mean for business? Part 1 of 3

By and | April 27, 2022

Sphera’s chief product officer, Mike Zamis, who’s responsible for the strategy and development of Sphera’s next-generation ESG solutions, talks about Scope 3 emissions and the climate risk aspects of the SEC’s March 21st climate disclosure proposal.


The following transcript was edited for style, length and clarity.

Brian Payer:

Hello and welcome to the Sphera Now ESG podcast – a program focused on safety, sustainability, and productivity. I’m Brian Payer, VP of environment, health, safety, and sustainability at Sphera. Today, we’re joined by Sphera’s chief product officer, Mike Zamis, who’s responsible for the strategy and development of Sphera’s next-generation ESG solutions, ranging from carbon accounting to net zero to health & safety to risk management. Thanks for joining the podcast, Mike.

Mike Zamis:

Thanks, Brian. Great to be here.

Brian Payer:

This podcast is part of a three-part series on the SEC’s March 21st climate disclosure proposal, which, if passed, will force publicly traded companies in the U.S. to measure and report their Scope 1, 2, and 3 emissions, as well as climate-related risks that could materially affect the company’s performance.

Today, we’re talking specifically about the Scope 3 and climate risk aspects of the SEC proposal.

The SEC’s proposed rule includes several provisions aimed at helping investors understand how climate change risks affect businesses’ operations, strategies, and financial performance and how businesses contribute to climate change. The most important provisions include mandatory reporting of Scope 1 and 2 emissions, which must be audited by a third party to validate; mandatory reporting of Scope 3 emissions, if they are material to the business’s financial performance, or if companies have made public commitments to Scope 3 reductions; and mandatory reporting of all climate-related risks that could materially affect the company’s performance—everything from natural disasters that are exacerbated by global warming to the impact of potential carbon taxes.

The proposed rule offers a phased implementation, with the largest organizations expected to comply by 2023, and smaller organizations by 2024. It includes carve outs and exceptions, as well as significant flexibility when it comes to whether and how businesses measure and report their Scope 3 emissions.

There are some sectors, Mike—like automotive, oil & gas, and mining—where Scope 3 emissions make up a significant portion, if not a majority, of companies’ overall emissions. How do businesses in these industries begin to wrap their arms around the scale of Scope 3?

Mike Zamis:

Brian, thanks for the question. It’s a big one. Scope 3 emissions is probably the most complicated element companies are facing. I think Scope 1 and Scope 2 emissions are understood by many companies because in some cases, they’ve had to report Scope 1 as part of a regulatory compliance element. But we really need to break down this Scope 3 emissions piece and understand how companies are going to tackle this problem. Scope 3 emissions come from your supply chain, upstream and downstream. So, this includes your partners’ and suppliers’ carbon footprints and the carbon footprint that’s created based on how your customers use your products.

Companies must investigate their supply chain and understand how the carbon coming into their organization is tracked. It’s a big challenge for companies to understand how their partners are making, manufacturing, packaging and shipping the components they use in their own products, that then go downstream to users.

Brian Payer:

Many Sphera customers have asked us to help them with their supply chains. Can you give us a sense of the scale of these supply chains? Are we talking three or five suppliers upstream and downstream? Dozens? Hundreds? How complicated and complex is this?

Mike Zamis:

It’s hundreds, if not thousands, and it’s N levels of supply tiers—tier one, tier two, tier three, et cetera. Companies need to delve into their supply chain to understand the part that goes into the part that goes into the part that goes into your product. They need to track all that through. Every one of these product carbon footprints is a calculation—an assessment of the energy needs, the materials, the manufacturing processes, packaging and shipping—that flows into every one of those steps. You can see how complicated this becomes.

Brian Payer:

The companies looking to dive into this—is this something they can do on their own? Do they have leverage upstream and downstream to ask for this data? Is it disclosable and are companies willing to share that type of data, or is that part of the challenge?

Mike Zamis:

Yes, and yes, Brian. A lot of large customers are able to ask their supply chain partners upstream, for example, to supply product carbon footprints and provide that data. In many cases, those suppliers are willing to provide it. On the other hand, there’s difficulty in getting that data right. A lot of suppliers are struggling to identify that information and supply it to their customers. They’re looking for certified, robust, simple ways to calculate this data and make sure it’s auditable and transparent over time.

Brian Payer:

I’m sure that many companies will be stepping up to tackle that challenge. Let’s shift gears and talk about reporting the risks from climate change. There are two big categories. One is physical risks, which includes weather events and the declining availability of natural resources. The second is transition risks, which includes changes in regulations, changes in technology, pressure on supply chains, et cetera. Why is this one challenging?

Mike Zamis:

Weather. I’ll just start with that. We’re asking everyone to predict the weather. And I think we all know from our nightly newscast how that may go. There is the question of: How do I describe the risks of my facilities, the risks of my assets, and what’s going to happen over time? What are the assumptions that go into that analysis? What is the modeling I’m doing to assess the risk on those assets? And then what am I doing about that?

Your transition risk is the second piece. If I’m changing the footprint of my assets, if I’m moving my business model, or I’m making other choices to protect the business from climate change or adhere to regulations—these are things that factor into transition risk, and the SEC is looking for these. How am I modeling the weather? What’s the impact on my assets relative to climate change? And then, how am I transitioning into a better footprint, given those changes? These are big, complicated analyses that most companies haven’t thought about yet.

Brian Payer:

We haven’t heard much about detailed risk assessments and how companies are getting at that. Why do you think that we’re not really understanding what these risks look like?

Mike Zamis:

I think companies are trying to understand what they must do now to satisfy the SEC proposed rule. Climate modeling is not a typical endeavor for most companies. Most of them haven’t worried about it, so this is a brand new thing. Scope 1 and Scope 2 have been well-understood. Scope 3 is also understood, though maybe not tackled yet. Climate scenario modeling has been a specialty of various companies, but it’s not really in the mainstream. We’re not hearing much because people are still trying to figure out what it means to them and what it means to their business.

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Brian Payer:

The SEC’s proposed rule is going through the comment period, and then it will enter a final rulemaking process. How do you see this developing?

Mike Zamis:

I wish I knew because then I’d be able to put some money down in Vegas on this one. I think it’s a depth-of-analysis question. How far does a company need to go? How detailed does the information need to be? How explicit and science-based are the assumptions and the data that go into the assessments? Can it be a simple, broad brush or does it need to be more detailed? We can expect that more detail will be required, and people will look for more specific information. That’s my initial guess, but we’ll see what the comments are and what comes out on the other side.

Brian Payer:

Many folks are reacting to the SEC’s proposed rule with surprise, but this train of disclosure has been rolling for many years, dating back to the TCFD (the Task Force on Climate-Related Financial Disclosures) and other jurisdictions that have rolled out similar rules. Could you put the SEC and U.S. regulations in the context of the broader paradigm shift around ESG reporting?

Mike Zamis:

Absolutely. In 2010, the SEC issued guidance on ESG and sustainability, and that was more of a proactive, principles-based assessment process. What you’re seeing now is the SEC moving to a prescriptive-based set of rules. A lot of those rules have been influenced by leadership in the EU—whether it’s the sustainable finance disclosure regulation, their corporate sustainability reporting directive or their EU taxonomy. The EU has been leading with a lot of these regulations. And the United States is looking across the pond at that. But there’s a groundswell here as well. You’re seeing that in the proposed SEC rule, and you will see more because it is important to investors who need to make sound financial decisions.

Brian Payer:

Right. Mike, is there anything else that you’d like to comment on?

Mike Zamis:

There’s one last thing, Brian. Over the last few years, companies, regulators, investors and consumers have been trying to determine what right looks like. There have been many competing disclosure frameworks, all good in their own right. But it has been difficult for companies and stakeholders to understand what good looks like. We’re starting to see consolidation in the disclosure marketplace that should lead to more clarity on ESG and sustainability metrics and reporting. The TCFD is really gelling as a core disclosure framework for people to rally around. Leveraging that framework will help the industry and its participants, investors, stakeholders and consumers make consistent, streamlined and unified decisions. That’s a good step forward.

Brian Payer:

There’s never a dull moment in the world of ESG and sustainability disclosures, but hopefully we’re trending toward something consistent, measurable, auditable and repeatable.

That completes our discussion, Mike. Thanks again for taking the time to speak with us.

Mike Zamis:

Thanks, Brian. It’s been great being here.

Brian Payer:

To the audience, thank you for listening. If you’d like to learn more about this topic, please join us for two webinars we’re hosting. On May 3rd, our topic is Getting Ready for Mandatory Climate Risk Reporting; this webinar is at 4:00 PM Central European time, 9:00 AM Central Daylight time. On May 10th, we’ll be talking about How Business Leaders Can Prepare for the SEC’s New Climate Ruling, also at 4:00 PM Central European time / 9:00 AM Central Daylight time. You can find more details at sphera.com/about/events. We’ll talk to you soon on the next podcast.

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