Why Some of the Most Trusted Companies Are Open About Their Climate Impact

When the Securities and Exchange Commission voted this month to require companies to disclose more about how they are responding to climate change, the country's largest business organization filed a suit to stop it. In its lawsuit, the U.S. Chamber of Commerce accused the agency of "attempting to micromanage" how companies make decisions.

But surveys of major companies and reviews of comments to the SEC show a growing number of companies support the move for broader disclosure about climate risks. Many companies say they see benefits from climate-related disclosure, including the potential to better understand company operations, gain an edge in recruiting talent, and enhance their reputation for trust.

"If you can earn that trust, if you can demonstrate that you are producing a more climate-friendly product, your sales will go up," climate data expert Ethan Soloviev told Newsweek. Soloviev is chief innovation officer at HowGood, a data analysis company that helps businesses in the food sector track the environmental performance of their supply chains.

Soloviev said that for many company stakeholders—particularly younger customers and investors—climate disclosure is becoming an integral component of trust.

"Trustworthiness will be built, I believe, only through showing your work, only through explaining what you're doing and having the real hard data," he said.

Roughly a fifth of the companies on Newsweek's latest ranking of the Most Trustworthy Companies in America also appear on Newsweek's list of America's Most Responsible Companies, a ranking that includes an assessment of a company's environmental, social and governance, or ESG, disclosure.

Kraft Heinz, the food giant with dozens of well-known brands from ketchup to Kool-Aid, is among the 130 companies appearing on both the Newsweek rankings of "most trustworthy" and "most responsible" companies.

"We know from research that 65 percent of consumers would like companies' sustainability practices to be more visible to the public," Kraft Heinz Head of Global Social Impact, Engagement and Governance Nicole Fischer told Newsweek in an email. "We want consumers—and suppliers, customers and partners—to be able to make informed decisions when it comes to buying our products or working with us."

Now as regulators at the SEC, in California and in the European Union ask companies for more climate-related information, many businesses are preparing to track not only their own emissions and climate risks but also those related to the products they produce and the supply chains they depend upon. This new coming level of transparency holds the promise to speed the decarbonization of many business sectors and radically change the concept of company trustworthiness.

Supply Chains at Risk

"Climate change has created billions and billions and billions of dollars of financial risk in every sector of our economy," Ceres President Mindy Lubber told Newsweek. Ceres, a nonprofit climate advocacy organization, analyzed thousands of comments the SEC received about its climate rule and found most companies and large-scale investors supported the SEC's action.

Lubber said this is largely due to the increasing awareness among businesses and investors about the climate-related disruptions to business operations and supply chains. As an example, she pointed to recent droughts affecting water levels on important shipping routes, including the Panama Canal, which forced a reduction in ship traffic.

"So, for an investor, they want to know, are the parts or widgets getting through the Panama Canal, can that affect delivery dates or shipment dates, or are they going to be in time?" she said.

As the global economy becomes more interconnected, disruptions from drought, flood, severe storms or extreme heat can have knock-on effects far away. And if you thought Lubber was exaggerating by repeating "billions" earlier, consider the findings of a recent study in the journal Nature. If anything, "billions" is a lowball estimate.

Researchers at University College London did a first-of-its-kind assessment of possible climate-related risks along global supply chains as the world warms in the coming decades. Their estimates of potential losses quickly reached trillions of dollars.
Accounting for the indirect economic impacts from climate change along supply chains, the researchers found net losses of between $3.75 trillion and $24.7 trillion by 2060, depending on how much more CO2 is released by then.

"These projected economic impacts are staggering," UCL professor Dabo Guan said in a release accompanying the study. "These losses get worse the more the planet warms."

In climate policy terms, greenhouse gas emissions and climate impacts fall into three buckets called "scopes." Scope 1 emissions are those a company directly controls through its practices. Scope 2 emissions come from the power and fuel used. Scope 3 includes climate risks and emissions associated with a company's value chain—the supplies purchased and products sold—and that is frequently where a company's greatest climate impact will be.

The SEC opted against requiring Scope 3 disclosure in its rule after howls of protest from some businesses. But regulations coming soon in the European Union and for large companies doing business in California—the world's seventh-largest economy—will require some level of Scope 3 climate reporting, and that has sent companies scrambling to find ways to measure their supply chain emissions.

Accounting for Scope 3

Accounting for Scope 1 and 2 emissions is fairly straightforward: What came out of our smokestack? Was our electricity from renewable energy or from high-carbon coal? But Scope 3 gets more complicated.

Consider the accounting task a major food company faces, Soloviev at HowGood said.

"They've got literally thousands of ingredients, sometimes from thousands of suppliers, and they have to figure out what is the impact of every single ingredient," he said. Most companies in that situation end up using blunt accounting tools to estimate climate impacts.

HowGood's service is built on the massive database it has compiled on the environmental profiles of agricultural companies and food ingredient suppliers around the world, offering a more granular view of where emissions and other environmental problems arise.

"Everyone can see what's happening, understand where the impact is, and then make decisions toward a more sustainable and regenerative future," Soloviev said.

HowGood's clients include Kraft Heinz, which is already including Scope 3 information in its sustainability reporting.

Other companies are offering data analysis services to help sort out the Scope 3 emissions in a range of industrial sectors. The 3-D design company Dassault Systèmes is applying its digital modeling capability to give companies a life-cycle assessment of their products and what goes into them.

Director of Business Consulting Raymond Wodar told Newsweek that decisions about what materials a company selects will often determine up to 80 percent of the greenhouse gas emissions profile of its products, and a life-cycle assessment makes those emissions visible at the outset.

"They can see the greenhouse gas impact of that before they even ship the product or build it," he said. "It allows companies to make better decisions in their material selection early in the process."

Not Backing Away From ESG

The software and service company Workiva recently surveyed hundreds of major companies and investors on their views on climate disclosure requirements and their plans for ESG reporting.

"I was surprised, honestly, by the results of that [benchmark] survey where it indicated that some 70 percent of companies had already assessed their readiness for compliance," Workiva ESG industry principal Mark Mellen told Newsweek.

Perhaps not so surprising is that companies said the coming regulations are driving most of their new reporting activity. But companies also voiced other reasons they want to incorporate climate and ESG information in their financial reports.

Companies said better ESG reporting can allow them to identify strategic opportunities, mitigate risks and meet expectations of their customers and investors.

For all the political uproar over ESG and "woke" businesses over the past year, the survey found 82 percent of institutional investors have not changed investment decisions despite the criticism of ESG.

"Institutional investors are not backing down when it comes to that," Mellen said.

There's a phrase Ronald Reagan made popular in the 1980s that might apply here: "Trust but verify." In the coming era of climate transparency, many companies that want to be trusted will have to verify their climate and sustainability action.