Large Companies Increased GHG Emissions

In the US, large companies are leading the way in reducing the growth of greenhouse gas (GHG) emissions: In 2022, S&P 500 companies' median total GHG emissions increased by only 3%, as compared to the 32% increase seen in Russell 3000 companies.

As revealed in a new report by The Conference Board and based on ESGAUGE data, larger companies are also at the forefront of renewable energy—with respect to both disclosure and utilization—but smaller companies are quickly gaining ground. In 2022, 66% of S&P 500 firms disclosed their renewable energy use. Moreover, their reported median renewable use increased by 26%. When it comes to S&P MidCap 400 companies, 27% disclosed their renewable energy use, nearly doubling their rate compared to 2021 (14%). And their reported median renewable energy use nearly tripled compared to 2021.

"The recent headway that companies have made on renewable energy use and disclosure can provide potential guidance for industry in general," said Paul Washington, Executive Director of The Conference Board Governance & Sustainability Center. "With nearly half of CEOs across the globe seeing the transition to renewable energy as a positive for their business, we are now seeing more firms, large and small, across industries setting an example on how to embrace the renewable energy transition."

The report offers forward-looking insights based on the growing demand for, and practices in, climate-related disclosures. Additional findings and insights include:

Climate Risk Disclosure: By Size and Sector
Climate risk disclosures are on the rise, with large companies and regulated industries leading the way.

• 74% of S&P 500 companies are disclosing climate risk, compared to 40% of the Russell 3000.
• Disclosure is most prevalent in sectors with strong regulatory and business reasons to address risks related to climate change, including utilities (93%), real estate (77%), and energy (75%).
• The lowest disclosure rates are in health care (15%), communication services (23%), and IT (24%) sectors.

The highest climate-risk-disclosing industries typically have climate target years furthest in the future.

• The high-disclosing utilities and energy sectors have target years of 2045 and 2040, respectively, for achieving net zero emissions.
• The low-disclosing health care and IT sectors have a target year of 2034—only a decade away.
• Understanding the disclosure gap: Companies with regulatory and reputational risks associated with climate change—for example, the energy sector—are likely to have strong governance structures and to have thoroughly considered the costs and benefits associated with the transition to lower GHG emissions.

Climate Risk Disclosure: Regulatory Efforts
Despite the desire for more consistent disclosure regimes, the emerging regulations, especially for large US-headquartered multinational companies, are becoming more fragmented and challenging.

• The EU is setting the pace: The CSRD (Corporate Sustainability Reporting Directive) will likely affect over 3,000 US firms. It is sweeping in its scope (applying to 10 ESG areas).
• Adhering to SEC climate disclosure requirements, if adopted, will not exempt companies from fulfilling their obligations under other regulations.
  • For example, the SEC climate-related disclosure rules are unlikely to qualify for the CSRD's provision that accepts comparable reporting.
• Many large public and private companies are directly affected, too, by California's recently enacted climate-related statutes.

"The trend toward greater climate-related disclosures is unmistakable. Companies that are subject to multiple reporting regimes may find it more effective and efficient to aim for disclosure that does more than meet inconsistent regulatory minimums and can be implemented consistently on a global basis," said Steve Newman, author of the report.

Even today there is an inconsistency in the climate-related topics covered.

• 94% of S&P 500 companies disclose their climate policies and 89% disclose their total GHG emissions, but 80% disclose their climate risks.
• Even apart from regulatory requirements, companies may want to ensure that they are more consistently addressing all elements of climate change: risks, opportunities, governance, and plans (including targets) toward lower GHG emissions.

"To go beyond compliance, companies should proactively identify climate-related concerns relevant to their operations and integrate them into their business strategy. At the same time, they should foster collaborations with industry peers, other industries, and with both upstream suppliers and downstream customers to help them align their efforts with broader climate objectives," said Umesh Chandra, Executive Director of ESGAUGE.

External Assurance
More robust climate reporting will require companies to increase external assurance.

• Climate reporting obligations set by the SEC, California, and the EU will impose escalating obligations on companies to verify their disclosures.
• While the SEC and EU rules will set the reporting obligations for companies under their jurisdictions, the ISSB standards may well set expectations for firms in the US and Europe.
• Companies will see an increased use of assurance services with respect to climate disclosures:
  • For instance, per the CSRD, non-EU companies' disclosures will need third-party assurance by a European or third-party auditor.
  • The proposed SEC rules and the California climate-related legislation will also require independent verification for Scope 1 and 2 GHG emissions.

The report highlights findings from an analysis of the disclosure of climate-related and sustainability reporting metrics by 2,969 companies in the Russell 3000. Comparisons are made with companies in the S&P 500 and S&P MidCap 400. The analysis is complemented with insights from a series of roundtables and focus groups held by The Conference Board on the topic of climate-related disclosure in the course of 2023.