The cost of climate regulation

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Apr 21, 2022 View in browser   By Lorraine Woellert Presented by THE BIG PICTURE There's a lot of excitement among investors and climate activists about a proposed federal rule that would require companies to disclose their carbon footprints. But regulation never comes cheap, and the draft plan from the Securities and Exchange Commission is no exception. The agency itself estimates that the climate reporting proposal will cost companies more than $10.2 billion The SEC's calculation outstrips the estimated costs of other big actions by the agency, including an overhaul of accounting rules in 2002 and a measure that took aim at conflict minerals in 2012. And it's likely to underestimate the actual cost of the rule, critics say. That's what happened in 2002, when Congress passed the Sarbanes-Oxley Act in response to a series of accounting scandals at Enron Corp., Tyco International PLC and WorldCom. SOX, as it's known among pencil-pushers, imposed strict rules on accountants, auditors and corporate executives. A key provision, Section 404, required companies to establish internal controls to prevent fraud and errors. The SEC estimated that SOX would cost individual companies about $91,000 a year. Under the climate rule, the agency estimates large companies, in the beginning, will spend an average of about $124,000 a year just to report emissions from their operations and energy use. But Sarbanes-Oxley compliance, in fact, cost some large companies millions of dollars, said Paul Washington , executive director of the Environmental, Social and Governance Center at The Conference Board, a corporate think thank. Companies are worried that the SEC's climate rule is "SOX 404 on steroids," Washington said. "Companies are looking at this through the lens of SOX. They're saying the estimates in the past have been a small fraction of the actual costs incurred." Adding to the anxiety is that SOX 404 merely juiced internal systems that, for the most part, already existed t. For many companies, the climate proposal would add an entirely new layer of reporting. "There were existing systems to work off of," Washington said of Sarbanes-Oxley. With the climate plan, "companies are concerned that, in many cases, they have to establish or significantly expand the systems that collect this information." But is $10.2 billion a lot of money? In the scheme of things, maybe not. The world's publicly traded companies are valued at nearly $106 trillion. In the U.S. alone, public companies alone are worth a collective $41 trillion. For that group, $10.2 billion, or even a multiple of it, is de minimis. And many companies already spend money to measure and report their greenhouse gas emissions. A message from National Grid: There Is A Better Way. National Grid is announcing our path to a fossil-free energy future. By using renewable natural gas, and green hydrogen produced from water using wind energy, we can achieve a fossil-free energy future by 2050 or earlier.   The question then becomes this: Will companies, their customers and their shareholders get something of value for that $10.2 billion? Economists say yes. In addition to informing markets, disclosure is expected to prod public companies to live up to their net-zero pledges. Failure to curb greenhouse gas emissions could cost the U.S. economy $14.5 trillion over the next 50 years, according to the Deloitte Economics Institute. Globally, the effects of climate change could reduce economic output by $23 trillion a year, according to researchers at insurance giant Swiss Re. "They need to look at whether there is a net benefit, from an economic perspective, of requiring new rules," said Wes Bricker, vice chair and U.S. Trust Solutions Co-Leader at consulting firm PwC. "There is a cost of this, but it's an investment." And a 2021 survey from the U.S. Chamber, NASDAQ and other business trade groups found that nearly two-thirds of companies already communicate with shareholders on climate. For those companies, the decision already has been made that the cost of reporting is money well spent. "They're already providing the reporting," Bricker said. "What is the overriding rational for an investment of this size? The rationale is that trust in the quality of information is necessary. Markets operate efficiently when there's accessible data that's reliable." There will be winners and losers. Large accounting and consulting firms, already inundated with demand for ESG-related services, are among the winners. PwC plans to spend $12 billion to create 100,000 new jobs to help clients with reporting on climate, workforce diversity and other ESG issues.   A message from National Grid:   Demand picked up a couple years ago as companies grew more concerned about greenwashing, Bricker said. Among the losers will be smaller companies, many of which don't report on emissions. Regulatory costs hit them harder as a share of revenue, said Tom Quaadman , executive vice president of the U.S. Chamber Center for Capital Markets Competitiveness. Innovation could take a hit. Fewer companies might want to go public, he said. "It puts it in context how large, even by the SEC's own estimates, the costs are going to be on the business community" — and the retirees and investors who own shares in those companies   INTRODUCING DIGITAL FUTURE DAILY - OUR TECHNOLOGY NEWSLETTER, RE-IMAGINED:  Technology is always evolving, and our new tech-obsessed newsletter is too! Digital Future Daily unlocks the most important stories determining the future of technology, from Washington to Silicon Valley and innovation power centers around the world. Readers get an in-depth look at how the next wave of tech will reshape civic and political life, including activism, fundraising, lobbying and legislating. Go inside the minds of the biggest tech players, policymakers and regulators to learn how their decisions affect our lives. Don't miss out, subscribe today.     YOU TELL US Team Sustainability is editor Greg Mott, deputy editor Debra Kahn, reporters Lorraine Woellert and Catherine Boudreau, and digital producer Jordan Wolman. Reach them at gmott@politico.com, dkahn@politico.com, lwoellert@politico.com, cboudreau@politico.com and jwolman@politico.com. Want more? Don't we all. Sign up for the Long Game. Four days a week and still free! A message from National Grid: National Grid is announcing our path to a fossil-free energy future for our customers and communities. Our fossil-free plan will help achieve the Northeast's aggressive climate goals and set a new standard for energy companies. We will use renewable natural gas, green hydrogen generated from wind and solar power, battery storage, and greater energy efficiency to make our National Grid system fossil-free by 2050 or earlier. Climate scientists say renewable natural gas is a win-win for the environment. There Is A Better Way to keep energy affordable, reliable, and clean. That's why we are creating a hybrid pathway that preserves customer choice while delivering the clean, affordable energy future our customers want and deserve. See How.   WHAT WE'RE CLICKING — Mastercard Inc. is linking employee bonuses to the company's ESG goals. Reuters has the details. — Colonial Pipeline is going to carry sustainable aviation fuel for the first time, S&P reports. — ESG funds are coming under fire in some states, The American Conservative writes.   STEP INSIDE THE WEST WING: What's really happening in West Wing offices? Find out who's up, who's down, and who really has the president's ear in our West Wing Playbook newsletter, the insider's guide to the Biden White House and Cabinet. For buzzy nuggets and details that you won't find anywhere else, subscribe today.       Follow us on Twitter Catherine Boudreau @ceboudreau Debra Kahn @debra_kahn Greg Mott @gwmott Lorraine Woellert @Woellert Jordan Wolman @jordanwolman   Follow us

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