SEC Climate Disclosures Incoming
SEC Climate Disclosures Incoming
Corporations will be forced to disclose their emissions, and carbon will be treated like a liability + more market news.
SEC climate disclosures are on their way. Companies will be forced to disclose their Scope 1 and Scope 2 emissions. The rules are expected to be finalized early this year, and take effect in 2025 or 2026.
What does this mean for investors? Increasing social pressure for companies to make tangible progress in combating climate change.
That directly benefits investors in climate solutions. You can expect ever-growing investment in green sectors as time passes. This is just another reason to add to the pile.
Here are the three main rules of the new climate disclosures according to Cloverly:
♦️ 1 – Narrative disclosures: Companies will need to comprehensively disclose their governance structures, risk management protocols, and strategic approaches toward climate-related financial risks. Companies will also need to provide a detailed report of their emissions footprint aligned with the principles laid out by the Task Force on Climate-Related Financial Disclosures (TCFD). This ensures that stakeholders and investors get a clear, thorough understanding of how a company navigates and mitigates climate-related financial risks.
♦️ 2 – Mandatory independent attestation: The second crucial aspect is the requirement for an independent review of these disclosures. It’s important to note that this applies specifically to accelerated and large accelerated filers. This provision is designed to be implemented gradually, with an initial phase focusing on Scope 1 and 2 emissions (Scope 3 will be required in subsequent years). Additionally, the level of assurance required will transition from “limited” to “reasonable” over time. This step is vital for ensuring the credibility and accuracy of the climate-related information provided by companies.
♦️ 3 – Integration into financial statements: Lastly, the proposed rule would necessitate the inclusion of a special note in financial statements. This note must detail the quantitative financial impacts of climate change on the company. It should cover both the risks from physical changes to the environment (physical risks) and risks associated with the transition to a lower-carbon economy (transition risks), along with how the company is addressing these challenges. Importantly, this requirement is only applicable if the financial impact is at least 1% of a specific line item in the financial statement, ensuring that the reported information is material and relevant.
The EU Is Run by Morons
The politicians running the EU are yet again proving themselves to be self-destructive on the climate front. Countries like Germany did it with their embrace and failure of renewables. Now we’re seeing it again with offsets.
The EU has decided that companies cannot describe their products using the terms “carbon neutral” or “climate positive” if they rely on the usage of carbon offsets. This ban takes effect in 2026.
Apparently… using carbon offsets is not a valid scheme for reducing emissions in their eyes. They’re throwing out the baby with the bath water.
Yes, the voluntary carbon markets have had their issues. The industry is continuing to work through tightening regulation and oversight. With that said, making it “greenwashing” to use offsets invalidates the main reason companies will engage in the carbon markets.
This gets rid of the social benefits. If they can’t virtue signal about reducing their carbon footprint, then most companies have no reason to offset their emissions at all (for now).
European politicians are hindering the progress of a market that will be necessary in the future. There is no way around it. You can try all you like. If you’re serious about solving climate change, offsets are your only shot at abating emissions that otherwise will not be.
O&G is used in more industrial applications than you might realize. This won’t be fixed with renewables.
The carbon markets will survive regardless. At some point, the EU will have to reverse this decision. So why even bother making it? Ignorance.
A Carbon Supply Squeeze Is Coming
In the wake of controversy with REDD+ and cookstove project over-crediting, we’re seeing a duality emerge in the voluntary carbon markets.
As methodologies improve, it’s predicted that newer carbon offsets will command substantial premiums over older offsets. It’s becoming increasingly clear that old offsets will essentially become worthless, or registries like Verra might have to invalidate them entirely.
Although that might never happen unless there was significant social pressure to do so… it would be a massive shock to these markets.
The end result of recent hysteria remains to be seen, but the fact remains… old offsets will not be trusted by market participants. We’re already seeing the effects play out now.
Finding quality offsets in large quantities can be a challenge. In my recent video on supply and demand in the voluntary carbon markets… we could see that supply was outpacing demand. But this doesn’t take into account the quality of the offsets being generated or retired.
Ultimately, I don’t know how long it will take for the voluntary carbon markets to see a resurgence. The first notable climate goals for most countries/companies are a ways away, in 2030.
I think the issues we’ve seen lately are actually bullish in the long term for this industry. If we want to reach net zero, increasing demand for carbon offsets is a “when, not if” question.
As supply is taken out of the picture, that only adds to the possible upside we might see down the line.
Both Sides of the Coin– Investors Win
I commonly talk about environmentally related investments, that’s the focus of this newsletter. With that said, there are investing opportunities on both sides of the climate crisis.
In an article from Reuters, they highlighted how China’s coal output hit record highs in 2023. China mined 4.66 billion metric tons of coal, to be precise. This is up 2.9% from the previous year, according to the National Bureau of Statistics.
Additionally, the country’s overall power generation (dominated by coal) was up 8% year-over-year as of December. There’s no shortage of demand for fossil fuels in developing nations. That’s not going to end any time soon.
Have no reservations about this… it will take decades, at a minimum, to phase out a majority of fossil fuel usage. This is evident when paying attention to the electrification of the developing world. Given this reality, carbon offsets will be a necessity for just as long.
South Africa’s Department of Mineral Resources & Energy will tell you this themselves. As laid out in their Integrated Resource Plan, their government has admitted they’ll likely fall short of their 2050 climate goals without the use of offsets.
Point being, investors win whether they invest in fossil fuels, or climate solutions.
Fossil fuel prices will rise, which will benefit the existing producers as supply gets squeezed. No one wants to own a coal mine– or an oil rig. So contrarian investors will see upside there. Albeit, investing in these commodities will get increasingly difficult as time goes on.
In the same vein, investors in climate solutions will benefit from the trillions of dollars that’ll flood into these sectors over the coming decades. Being on the side with public support is certainly easier, but you can see the merits of both.