The Securities and Environment Commission?
The SEC is getting into the climate business.
Disclosure: I like Gary Gensler. That said, I don’t pay enough attention to the news to determine if he is truly a great chairman for the SEC. How can I like somebody I don’t pay attention to? Well, I took his Blockchain and Money course that MIT offers online for free. I learned a lot from it and would highly recommend it to anybody trying to wrap their head around the world of cryptocurrency.
Anyways, the SEC recently published a new set of potential rules requiring public companies to make “certain climate-related disclosures” in their public reports. That 510-page recommendation can be found here. Keep in mind the SEC has been around since 1934 and it took almost nine decades to develop and enhance the current system of rules regulating how publicly traded companies should disclose their financial performance.
These potential new rules would require all U.S.-listed companies to describe a tremendous amount of technical information, such as:
What are specific climate-related risks they face
How they plan to manage those risks
What their transition plan is to adopt to a warming world
Do they use scenario analysis to assess the resilience of its business strategy to climate-related risks
Do they use an “internal carbon price'“ to budget for emissions
Do they leverage carbon offsets and if so, how do they quantify their data
Companies will also have to disclose their greenhouse gas emissions, aka the Greenhouse Gas Protocol. I won’t get into the weeds, but if you want to, the SEC’s own summary fact sheet is here.
At the end of the day, the SEC is in the business of making sure investors get the accurate information they need. If Gary and his SEC minions tell you to write a bunch of climate disclosures and put them in your annual report, and those disclosures are not accurate, you will get very sued. That said, it seems reasonable to state that a lot of investors want this type of disclosure. Why? Well, if you haven’t noticed, ESG (environmental, social, and governance) investing is HOT right now.
How does this all relate to healthcare? Well, of JLL’s top healthcare 50 clients, 96% have publicly-stated sustainability goals (and 88% have goals that will expire by 2025), but only 19% have an action plan and committed budget to achieve them. This data was derived before this new new SEC announcement. My guess is that the majority of these action plans and committed budgets do not align with the SEC’s new climate impact requirements.
Another fun fact - ACHE published it’s top concerns in 2021 for CEO’s. Guess what? Carbon footprint and climate impact weren’t referenced at all in the survey. I share these two points because it appears that hospital leadership and their respective boards are woefully underprepared for what’s in the SEC regulation pipeline.
Page 200 of the SEC proposal discusses the question: How do you calculate your greenhouse gas emissions?
In addition to setting its organizational and operational boundaries, a registrant would need to select a GHG emissions calculation approach. While the direct measurement of GHG emissions from a source by monitoring concentration and flow rate is likely to yield the most accurate calculations, due to the expense of the direct monitoring of emissions, an acceptable and common method for calculating emissions involves the application of published emission factors to the total amount of purchased fuel consumed by a particular source. The proposed rules would define “emission factor” as a multiplication factor allowing actual GHG emissions to be calculated from available activity data or, if no activity data is available, economic data, to derive absolute GHG emissions. Emission factors are ratios that typically relate GHG emissions to a proxy measure of activity at an emissions source. Examples of activity data reflected in emission factors include kilowatt-hours of electricity used, quantity of fuel used, output of a process, hours of operation of equipment, distance travelled, and floor area of a building. If no activity data is available, a registrant may use an emission factor based on economic data. For example, when calculating Scope 3 emissions from purchased goods or services, a registrant could determine the economic value of the goods or services purchased and multiply it by an industry average emission factor (expressed as average emissions per monetary value of goods or services).
Furthermore, the SEC proposal goes on to discuss the required qualifications for an “attestation provider”. Attestation provider is a fancy way of saying you need to hire a 3rd party audit from that will certify your reported greenhouse gas emissions.
This SEC proposal is functioning as substantive regulation even though it appears to be purely disclosure regulation. For example (Page 100):
The proposed rules would require a registrant to disclose a number of board governance items, as applicable. The first item would require a registrant to identify any board members or board committees responsible for the oversight of climate-related risks. The responsible board committee might be an existing committee, such as the audit committee or risk committee, or a separate committee established to focus on climate-related risks. The next proposed item would require disclosure of whether any member of a registrant’s board of directors has expertise in climate-related risks, with disclosure required in sufficient detail to fully describe the nature of the expertise.
Another proposed item would require a description of the processes and frequency by which the board or board committee discusses climate-related risks. The registrant would have to disclose how the board is informed about climate-related risks, and how frequently the board considers such risks. These proposed disclosure items could provide investors with insight into how a registrant’s board considers climate-related risks and any relevant qualifications of board members.
Is Gary here saying to companies that “your board and or executive leadership need to carve out 15 minutes of every single meeting to discuss climate risk and hire a Chief Environmental Officer”? No, he is not; that is absurdly beyond the SEC’s authority.
But… perhaps this will more of a farce than anything and companies behavior won’t change, but the (reasonable) theory seems to be that if you force boards and or leadership to talk about climate change they will end up doing something about it too. One of the bigger challenges I see healthcare leadership having to tackle is the part requiring companies to include GHG emissions not otherwise included in a registrant’s generation of electricity purchased and consumed. Rather, upstream and downstream activities of a registrant’s entire value chain, aka all hospital suppliers and vendors, leased real estate, data centers… the list as it relates to healthcare can go on forever.
Large healthcare organizations can easily have hundreds of vendors across the enterprise. My brain hurts when I try to think about how this new dynamic will work. Circling back to my point about disclosure regulation versus actual regulation; this is going to force U.S.-listed healthcare organizations to only want to work with vendors that meet high GHG emission standards. This will also add a new layer of analysis when deciding whether to acquire a new piece of commercial real estate to retrofit for outpatient services. Or who to outsource data storage to. Like I said before, the list is endless.
It’s hard to argue against the SEC being an all-purpose regulator. The last thing you want to be is on their radar, which has now evolved to include a whole new wave of environmental regulation requirements, hence the title of the article, the Securities and Environment Commission.
JLL is one of the world’s leading real estate services provider, which puts us in a unique position to help. If energy management is a business challenge for your enterprise, email me at mike.jambrone@am.jll.com.