U.S. companies would face additional scrutiny on their promises to slash emissions under a section on corporate transparency in a Senate-passed budget deal.
Among the billions of dollars of clean energy tax credits and private investments for decarbonization in the legislation is a provision that would provide $5 million for the Environmental Protection Agency to verify corporations’ commitments to reduce their greenhouse gas emissions and other climate pledges.
The funds would be used to support “enhanced standardization and transparency of corporate climate action commitments and plans to reduce greenhouse gas emissions,” according to the bill text. The EPA would also oversee corporations’ progress toward its emissions targets and climate goals, emphasizing “enhanced transparency” on whether companies are on track to meet such objectives.
EPA Administrator Michael S. Regan and his successors would have until the end of fiscal 2031 to utilize the $5 million and future appropriated funds to examine corporate climate goals, shielding the funds from cuts in future appropriations, especially if Republicans take back control of either chamber of Congress.
The framework within the social and climate economic package sets up the EPA to create a type of mandatory disclosure on companies’ climate goals. Disclosure has been a hot-button issue in Washington as federal agencies move to fulfill the Biden administration’s goals to cut emissions by up to 52 percent by 2030 from 2005 levels and mitigate exposure to climate-related financial risk.
"Addressing the climate crisis requires all hands on deck, and businesses have an important role to play in reducing emissions," said Sen. Thomas R. Carper, D-Del., who worked on the provision with his Environment and Public Works Committee staff.
"Today, many U.S. corporations are trying to meet net zero goals and want the opportunity to be more transparent about climate actions with shareholders," Carper said in a statement. "This investment is going to help companies provide better metrics around climate in an apples-to-apples way.”
The section was one of many legislative items that Senate policy staff have been working on since the start of the 117th Congress, according to a Democratic staff member on the Environment and Public Works Committee.
Major U.S. companies have told Democratic staff of concerns about whether their projects and carbon offsets would meet net-zero goals, leading to the EPA provision, the staff member added. They declined to name specific companies.
The European Environment Agency and groups including the Digital Climate Alliance and the International Emissions Trading Association also met with Senate policy staff to discuss the provision and advocate for additional transparency on companies' climate pledges.
The House is expected to clear the bill Friday, concluding a year's work by Democrats on multiple attempts to pass ambitious climate legislation.
Climate finance experts see the initiative for the EPA to further study corporate climate action as an important step and critical tool to tackle climate change.
“We really need all hands on deck to improve standardization and transparency on corporate commitments and, more importantly, progress toward those commitments,” said Laura Draucker, director of corporate greenhouse gas emissions at Ceres, a non-profit organization that works with investors and companies on sustainability issues.
“That's really the benefit of the EPA leading on this. They have been a source of information for many people on GHG emissions and things of that nature for many years, and this seems like a good fit,” Draucker said in an interview.
Investors have been rallying for corporations to provide more information on their climate pledges, including on incremental reductions in greenhouse gases, net-zero emissions and alignment with the Paris Agreement.
More than 1 in 5 shareholder proposals on environmental, social and governance issues filed during the 2022 proxy season were related to climate change, according to a report led by shareholder advocacy group As You Sow.
The provision in the budget deal would be effective in meeting activist shareholders’ demands for such information, Draucker said.
For example, the EPA could work with organizations that have already done a lot of legwork on voluntary disclosures, such as the Science Based Targets initiative, and use those frameworks to build an accurate and verifiable reporting regime.
“I think enhanced standardization and transparency is only going to make it easier to find the data and track it, but I think it should help reduce misinformation, help reduce greenwashing claims” and hold companies accountable on their emissions targets, Draucker said.
Building on other policy
Whatever policy the EPA comes up with would supplement a range of others from several agencies on climate risk. The most consequential rule is a proposal from the Securities and Exchange Commission to mandate standardized information on companies' direct emissions and other material risks from climate change.
Democrats including Carper have backed the rulemaking and echo investors and ESG proponents’ concerns that stakeholders will be in the dark on companies’ full risk profile without an SEC rule on climate risk disclosure.
Meanwhile, Republicans have argued that federal agencies under President Joe Biden are overstepping their statutory authority on climate risk policies or acting beyond directives from Congress. Those concerns have ramped up following the Supreme Court’s ruling, in West Virginia v. EPA, that the agency doesn't possess broad authority to regulate pollution from electric utilities.
“Overall, this provision serves another piece in the whole-of-government efforts to address climate-related financial risk,” said Elizabeth Small, general counsel and head of policy at CDP North America. CDP is a not-for-profit organization that runs its own environmental disclosure system.
“The SEC disclosure rule is distinct from the EPA’s effort in that the SEC requires transparency on financial risk — including the transverse risk of climate; it does not regulate behavior — rather, it asks ‘what’ questions,” Small said in an email. “Here, the EPA fulfills its mission to protect our environment: providing tools that address the ‘how.’”
A potential pitfall to an EPA disclosure rule is that it may add to companies’ headaches on the various disclosures they are asked to do, Ceres’ Draucker cautioned. An eventual rule from the agency will need to work in conjunction with rulemaking from the SEC and other agencies.
“Companies do have a point to be made that they don't want to spend all their time disclosing,” she said. “Disclosing is not the end goal, but disclosure is very necessary to assure we're on the right track.”