Investors, customers, and employees are increasingly interested in evaluating firms’ environmental impact. This is good news. We are all better off when companies are accountable for their actions. Seizing on this trend, the SEC has a pending proposal to mandate disclosure of companies’ carbon emissions and Governor Newsom has committed to signing a bill that does the same in California. This is bad news. Mandatory disclosures will do more harm than good.
The mandates require companies to disclose their direct emissions (Scope 1 emissions), the emissions of others used to power their operations (Scope 2), and the emissions in their supply chain (Scope 3). In California, even employees’ travel and commutes would be included. The SEC estimates that compliance with its proposed rule would cost almost $6.5 billion annually, more than doubling companies’ overall costs of disclosure. Economists estimate the costs at many times this amount. The California mandate will add to these costs.
What do we get for all this money, other than more employment for consultants, lawyers, and accountants? Not much. Estimates of direct carbon emissions already exist absent mandates. S&P’s Trucost, for instance, provides detailed emissions data for several thousand companies based on voluntary disclosures and its own estimates and models. A recent study in Science uses these data to compare across industries and among companies in particular industries, giving investors and others the kind of information they need.
More and more voluntary information is being produced every day because stakeholders demand it. Government mandates make sense only to remedy market failures. The market for information is starting to work here.
To make matters worse, requiring companies to determine Scope 2 and 3 emissions is inefficient and often just guess work. It makes no sense to have Apple determine and report the emissions of chip manufacturers when the suppliers have that information. It also risks double counting.
Disclosure requirements could be a net harm to the environment. Requiring companies to focus on carbon means distracting them (and the public) from other environmental issues. As the late management guru Peter Drucker warned, what gets measured gets managed. EVs, for example, require many times more minerals than conventional vehicles, and asking only about carbon means companies will not care about or report other pollution, such as that related to soil contamination and water quality from mining. Surveys show that Americans still care more about local water pollution than climate change. People demand environmentally responsible companies overall, not ones obsessed with legal mandates.
Consider the problems that hyper-focused disclosure rules have caused elsewhere. When the SEC tried to stamp out so-called conflict minerals using a disclosure mandate throughout the supply chain, the intended beneficiaries were worse off. Violence and infant mortality increased after the rule. The policy failed because companies were compelled to care only about one thing in their supply chain (whether some purchases may have benefited armed groups), at the expense of the net impact of providing employment, income, and products that consumers want.
To be sure, the California proposal is preferable to that of the SEC. Legislatures, not bureaucrats, should make policy changes with huge consequences. Moreover, the SEC rule is limited to public companies, which leaves out emissions by large private firms and may affect decisions about whether to be public in the first place, thereby distorting investment decisions. Securities disclosures also generate costly class action lawsuits, which are often distracting strike suits. Though the California bill goes through the appropriate channels, it is still bad policy.
That big companies, like Apple, Microsoft, and Alphabet, support these mandates is not evidence of their wisdom, but rather that they can serve narrow corporate interests. Mandatory disclosure of carbon raises rivals’ costs, thus stifling innovation and competition.
To be sure, mandated disclosure will increase information about carbon emissions. But at what cost and at what risk of unwanted consequences? Firms and third parties have responded by voluntarily disclosing vast amounts of data, and academics and investment professionals are developing approaches to estimating net environmental impact. Any mandate, whether from California or the SEC at this point is premature and likely to be redundant of and counterproductive to market processes for giving firm stakeholders the information they want and need.
