The era of greenwashing and other forms of inaccurate carbon reporting is over. The US Securities and Exchange Commission (SEC) and investors have both begun to penalize companies with poor ESG practices in recent years, but that has only been the beginning. Under the SEC’s proposed Enhancement and Standardization of Climate-Related Disclosures for Investors (aka the “climate disclosure rule”), public companies may face consequences such as:
- Redundant work and associated costs
- Regulatory fines and penalties
- Investor fallout and legal action
- Brand and reputational damage
In our new whitepaper, we have a full breakdown of why accurate carbon reporting is now a baseline business requirement. Here, we’ll focus on a quick summary of the potential repercussions of inaccurate SEC carbon reporting — plus the reason why using actual energy figures is necessary to avoid such consequences.
Download our full whitepaper on carbon reporting for a deeper dive.Download here
Redundant work and associated costs
In the official climate rule proposal, the SEC estimates that compliance costs during the first year will be $640,000 (and $530,00 in subsequent years) for large enterprises and $490,000 (and $420,000 in subsequent years) for smaller reporting companies. Additionally, a separate survey from the SustainAbility Institute by ERM found that private sector organizations currently spend $677,000 per year measuring and managing climate-related disclosures.
If a company’s carbon reporting is found to be inaccurate, it’s likely that activities and associated costs will have to be repeated across several key categories (average figures taken from the aforementioned survey):
- GHG analysis and/or disclosures: $237,000
- Internal climate risk management controls: $148,000
- Proxy responses to climate-related proposals: $80,000
- Assurance/audits related to climate: $82,000
Having to revisit these activities could easily cost a company several hundred thousand dollars (if not more). Organizations should seek out an automated emissions data solution that makes it easier to get reporting right the first time and avoid unnecessary expenses.
Regulatory fines and penalties
While noncompliance fines and penalties won’t be announced until the climate disclosure rule is finalized this spring, the SEC will likely take some form of disciplinary action for violations. Sanctions may be especially harsh for organizations that intentionally misrepresent carbon emissions (aka “greenwashing”). A proposed UK law that would levy fines of up to 10% of global turnover for greenwashing provides an example of what severe ESG fines can look like.
In the US, there have been several instances in recent years where the SEC has issued fines or penalties for actions related to ESG. A few noteworthy examples include:
- Goldman Sachs was charged $4 million for failing to follow its policies and procedures regarding ESG investments.
- Compass Minerals was charged $12 million for misleading investors with inaccurate environmental reports.
- BNY Mellon was charged $1.5 million for claiming that certain funds had undergone an ESG quality review.
- Fiat Chrysler was charged $9.5 million for failing to disclose the limited scope of its internal emissions audit.
If companies don’t shore up their carbon and climate reporting ahead of the disclosure rule, they may very well have to face regulatory repercussions. In an open letter published June 2022, leading US senators urged the SEC to move forward with the rule: “Public companies and their auditors would have powerful incentives to ensure accurate reporting of climate-related financial information because penalties for misstatements and weak internal controls can be severe.”
In the past decade, ESG has quickly become one of the most important factors that investors evaluate when making decisions. According to a 2022 study from Capital Group, 89% of investors take ESG issues into account as part of their investment strategy.
Because investors now expect companies to make good on their sustainability promises and claims about ESG performance, inaccurate carbon reporting can cause disputes that turn into legal issues. Per Bloomberg’s Matt Levine: “And now you could imagine thinking ‘companies produce ESG statements, investors read the ESG statements and use them to make investing decisions, and if the ESG statements are wrong that is securities fraud.’”
A few examples of investor lawsuits related to ESG include:
- Compass Minerals is facing a class action lawsuit from investors who were affected by the alleged securities fraud related to the company’s false ESG statements.
- Enviva is facing a class action lawsuit from investors who were affected by the alleged securities fraud concerning greenwashing and related misleading statements.
- Danimer Scientific is facing a class action lawsuit from investors who accused the company of greenwashing by misrepresenting the sustainability of its product.
- Fiat Chrysler settled for $110 million in a class action lawsuit brought on by investors who alleged the company gave false emissions statements.
Several of these companies were hit with regulatory action from the SEC and legal action from investors. This is a sobering reminder that, in many cases, companies with inaccurate reporting have to face multiple consequences with disastrous effects.
It should also be noted that legal action related to flawed ESG is only just starting to ramp up — the SEC climate disclosure rule is expected to produce a significant uptick in legal risk for companies that don’t practice accurate reporting. The Norton Rose Fulbright 2023 Annual Litigation Trends Survey discovered that just 2% of companies in the US and Canada saw lawsuit activity on ESG topics in 2022. However, nearly a quarter (24%) said they will likely have a higher level of exposure to such litigation in 2023 and over a quarter (28%) said that their legal exposure related to ESG has recently grown.
The long-lasting damage a company can suffer from ESG misconduct is often overlooked or underestimated. One UK study of FTSE 100 companies found that the average value of losses due to regulatory fines was approximately 0.045% of market cap while the average value of reputational losses was 5.49% — or an astounding £1.15 billion ($1.38 billion).
Public perception and brand reputation often suffer in the aftermath of a carbon emissions-related scandal. For example, after Volkswagen was caught using software to bypass EPA emissions standards, the company’s stock plummeted more than 50%. This not only hurt their reputation, but the reputation of other German automakers that weren’t involved.
As regulations such as the SEC climate disclosure rule take effect in the US, reputational damage resulting from fines and penalties will also be severe. In the Recommendations of the Task Force on Climate-related Financial Disclosures, from which the disclosure rule takes much inspiration, the report explicitly lists “increased costs and/or reduced demand for products and services resulting from fines and judgments” as a financial impact of bad reporting.
The benefit of using actuals, not estimates
Don’t let inaccurate data hurt your company. Today, many corporate carbon disclosures rely on an alarming amount of estimates and averages. To remedy this and reduce risk ahead of the SEC climate disclosure rule, organizations must use actual energy figures, not estimates.
The best way to gain access to accurate data straight from the source is through automation — and Arcadia’s Arc platform is the best way to automate data related to Scope 1 and 2 emissions. Arc features data automation that is faster, more cost-effective, and more accurate than anything else on the market.
To learn more about the consequences of inaccurate reporting and how to modernize your data and processes to ensure compliance, download our new whitepaper: Why accurate carbon reporting is now a baseline business requirement.