Companies May Soon Have to Reveal a Hidden Risk: Carbon Emissions

In 2020, Microsoft decided it wanted to be “carbon negative” by the end of the decade—to remove more greenhouse gases from the atmosphere than it produces. That first year, it started on the right foot; emissions fell 6 percent. But in 2021, the pandemic had a strange side effect. The company’s Xbox One X was selling in droves, and stuck-at-home gamers played a lot more than they ordinarily would. That affected Microsoft’s bottom line—for carbon. The company estimates the console produces about 1,600 pounds of carbon emissions over its lifetime—some of that from the process of making the machine, but the vast majority simply because gamers are plugging into a dirty electricity grid. Along with factors like data center construction and equipment making, many thousands of hours of Call of Duty: Warzone were one big reason why last year Microsoft’s overall emissions spiked more than 20 percent.

Calculating a company’s responsibility for emissions has always been tricky. Companies use energy and produce greenhouse gases directly, of course—by operating offices and data centers, making products, and converting carbon-absorbing wilderness into wasteland. No arguing with that. But then there’s everything else: the suppliers who make the widgets for their products or construct new buildings, the raw materials extracted from mines, the vast global shipping networks. They all pump out carbon too. Plus, businesses have customers whose energy use goes up when they buy a new computer or switch on that Xbox. A few companies, like Microsoft, count up all those emissions and voluntarily publish the results. Most, despite splashy goals to cut emissions, don’t.

The US Securities and Exchange Commission wants to change that. Last week its commissioners proposed new rules that would require public companies to start laying out all of their greenhouse gas emissions—not just those they spew themselves, but all the carbon required to keep their businesses running. For the first time in the US, this would create a standardized disclosure of every publicly traded company’s carbon footprint, to be delivered to investors regularly. The rule isn’t final yet—there are two months of public comments ahead, and plenty of pushback is expected on where to draw the line for what emissions a company is responsible for and what standards to use. But the SEC wants to go broad. Its rationale, in a word, is risk.

Climate risk is often thought of as physical risk: Perhaps your factory happens to sit near a failing seawall or a wildfire zone—or maybe it could be soon, due to rising seas and temperatures. The SEC unsurprisingly wants businesses to disclose that kind of risk. But there’s a second kind of risk that stems from the very act of emitting carbon. In its purest form, that sort of business risk might appear as a tax on carbon emissions. But as the tide shifts toward addressing climate change, there are all sorts of other factors, from legal challenges and restrictions on emissions to changes in technology and customer preferences that will endanger oil-burning businesses. That’s called “transition risk” in sustainability consultant-speak. The amount of carbon a company emits is a proxy for it. And requiring disclosure of this type is a little more revolutionary. “What I like is that they have given special importance to emissions,” says Gireesh Shrimali, a Precourt Scholar studying sustainable finance at Stanford University.

Requiring companies to disclose transition risks is a long time coming, says Alexandra Thornton, who leads tax policy at the Center for American Progress, a liberal think tank. Many companies have already started considering physical climate risks—because, duh, they’re a real and present danger to their bottom lines, causing billions of dollars of damage every year. Many also report their emissions, keeping tabs on progress toward publicly stated targets. But they vary in their methods, accuracy, and just how much companies are willing to reveal. The SEC’s point is to standardize what companies report and perhaps unearth concerns that execs only calculate and worry about in private. That way, investors can decide for themselves if a company is making a risky gamble on a carbonized future. Maybe that will force them to do better. “If you measure something, you manage it,” Thornton says.

Right now, much of that measuring is done through a set of guidelines called the Greenhouse Gas Protocol. It divides emissions into categories: So-called Scope 1 emissions include the emissions a company produces itself, while Scope 2 tallies the emissions from producing the energy it uses—perhaps released by a distant coal plant, but still integral to the business. Scope 3 covers everything else, from vastly complex supply chains to the energy demands of customers to emissions from the cars that employees drive to work. For most companies, “Scope 3 is by far the largest share,” says David Rich, a senior associate at the World Resources Institute, a nonprofit that developed the protocol.