May. 13, 2022
May 13, 2022 My research is directly concerned with corporate climate disclosures, in particular those related to GHG emissions and associated emissions reduction targets, and am intimately familiar with many of the issues this proposed rule seeks to address. This comment addresses section II.I of the proposed rule: Targets and Goals Disclosure, and is presented in response to requests for comment provided with the proposed rule. In summary, findings from my and others research indicate the need for a disclosure mechanism to ensure accountability for reliability and consistency of corporate emissions targets disclosure over time. Specifically, we understand that emissions reports are arguably easier for companies to misrepresent than financial reports (Callery and Perkins, 2021) and that companies have heretofore been allowed excess discretion in altering emissions targets over time (Callery and Kim, 2020). Regarding Request for Comment 169. Yes, the proposed rule should require firms to disclose detailed target parameters that allow investors to assess the rigor of the target, including: scope of activities and emissions included, unit of measurement and absolute versus intensity, time horizon, baseline time period and emissions, interim targets, and plans to attain the targets. Provided these minimum details of an emissions target, an investor is reasonably equipped to interpret the significance of the target as relates to a firms climate-related risks. One additional target parameter that should be provided is the percentage of total firm emissions (in the scope targeted) that are covered by the target. This important parameter allows investors to understand the magnitude of the target relative to the firms overall emissions profile, and most firms that already file a CDP response are familiar with reporting it. Regarding Request for Comment 170. Yes, the plans for attaining targets are important to investors and should be disclosed for reasons outlined in the proposed rule. A plan or roadmap detailing the various initiatives that will enable the firm to attain its target will help investors understand the general timeframe and estimate expected costs or benefits to the firm of successful implementation. For example, emissions reduction efforts may be more meaningful to a companys mitigation of climate-related risk if alternative energy sources or efficiency measures drive the reductions (e.g., potential sources of future cost efficiencies) as opposed to, say, divestiture of facilities and lines of business, carbon offset mechanisms, or carbon capture and sequestration projects (e.g., likely sources of ongoing elevated costs). Regarding Request for Comment 171. Yes, measures of target progress are critical for investors to effectively assess a companys climate-related risk. Reported progress against a target offers investors a direct means of assessing the effectiveness of a companys prior efforts and thereby the relative likelihood of the company attaining, exceeding, or falling short of its goals in the near future. As an analogy, we know that investors hold companies to account for progress against voluntarily disclosed financial targets, and so company managers generally assume an obligation to periodically update investors on such progress. For each target disclosed in a prior year, companies should (1) specifically reaffirm that target, or (2) if the target has expired (reached the target date), changed, or otherwise scrapped, provide a thorough explanation of how and why the target was changed or scrapped and (3) report progress made against the target in the recent reporting period, compared to pro gress made in other previous reporting periods. Regarding (2), as all target parameters (such as mentioned in response to request for comment 170, above) should be XBRL-tagged (as provided in section II.K of the proposed rule), allowing investors to assess changes in target parameters, such a requirement would offer company managers the opportunity to explain these target changes to investors should they be legitimate and associated with some specific business purpose. Regarding (3), such disclosure requirement would allow investors (again leveraging XBRL tagging over multiple time periods) to assess the quality of a companys efforts to attain its goals (e.g.., plotting a trajectory of emissions reductions over time against a specified target, and correlations of any target changes with such calculated trajectories), again enabling more accurate investor assessments of the companys climate-related risks. Companies may also provide investors with detailed reasons for progress (or lac k thereof) in the previous reporting period. For example, CDP currently solicits disclosure on reasons for changes in company emissions, with categorical answers corresponding to emissions reduction activities, divestment, mergers or acquisitions, changes in output, changes in accounting methodology, or changes in reporting boundary. References: Callery, P. J., Kim, E.-H. (2020). Moving Targets: Aggressiveness, Attainment, and Temporal Dynamics in Corporate Carbon Targets. Working Paper, available at: https://ssrn.com/abstract=3822553. Callery, P. J., Perkins, J. (2021). Detecting False Accounts in Intermediated Voluntary Disclosure. Academy of Management Discoveries, 7(1), 4056. Preprint available at: https://ssrn.com/abstract=3520704.