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Columbia Energy Exchange

The SEC Mandates Climate Disclosures


Shiva Rajgopal

Kester and Byrnes Professor of Accounting and Auditing, Columbia Business School


Shiva Rajgopal: We calculate and report income well because we have an income tax. We calculate and report revenue and sales well, because we have a sales tax. Unless there is a carbon tax and unless there’s a penalty associated with under reporting, borderline criminal penalty, people won’t invest in the systems needed to actually track carbon value add.


Bill Loveless: Last month, the Securities and Exchange Commission took a big step to get a foothold on climate related risk for businesses. On March 6th, the SEC adopted new rules to standardize climate related disclosures for public business and public offerings, hoping to provide investors with consistent and comparable information. The agency’s new rules require companies to disclose emissions and the expenses and losses associated with climate risks and annual filings and reports. But the ruling immediately faced backlash from critics questioning its legality and its effectiveness.

So how does the SEC define climate related risks? How do their disclosure requirements compare to similar rules passed in the European Union and California, and what are the critics saying?

This is Columbia Energy Exchange, a weekly podcast from Columbia University Center on Global Energy Policy. I’m Bill Loveless.

Today on the show, Shiva Rajgopal. Shiva is the Kester and Byrnes professor of accounting and auditing at Columbia Business School. His research interests span financial reporting, earnings quality, fraud, executive compensation, and corporate culture. From 2017 to 2019, Shiva served as the vice dean of research for Columbia’s Business School and has been a faculty member at Duke University, Emory University, and the University of Washington.

Following the SEC’s Climate Disclosure Rules, Shiva wrote an op-ed for Forbes outlining what an investor might want from corporate disclosures on climate change risks. So I invited him to discuss this article. It’s called The SEC’s New Climate Rule is a Reasonable Political Compromise in An Election Year. We also talked about the current ESG landscape and other climate disclosure regulations. I hope you enjoy our conversation. Shiva Rajgopal, welcome back to Columbia Energy Exchange.


Shiva Rajgopal: Thank you so much, Bill. Thank you.


Bill Loveless: Shiva, you’ve been on the show before, but for those who may not be familiar with you, what makes you tick?


Shiva Rajgopal: Ah, what makes me tick? What makes me tick? I don’t know. I guess I like to work. I’m intellectually curious. I work very hard. That’s why I’m interested in too many things. I’m probably scattered, but it also helps me connect things that others don’t necessarily connect. There’s always this tension between breadth and depth in research. Right?


Bill Loveless: Yeah.


Shiva Rajgopal: So for a while I’ve been working on ESG type topics, and as you know, my day job is that of an accountant, and I’ve been worrying a lot off late about how our reporting model for how value gets created and how it gets distributed, and how it gets destroyed. It’s pretty inadequate in today’s world. Climate being a part of that natural capital, broadly being a bigger part of that. So hopefully that gives you some sense for at least my intellectual leanings. I also try to be evidence-based and I try not to be political, but this is an inherently political topic.


Bill Loveless: Yeah, right. Well, listen, we’ve talked about this SEC rule before. We did it, so a couple of years ago when it was first proposed. And now here we are two years later. There’s been some 24,000 comments on it, and the rule is out. So to start with, to be clear, what would this rule do?


Shiva Rajgopal: It’s an excellent point. As you know, the litigation, I think it barely took a week right for people to contest the rule. So will this rule ever see the light of day is a question that one should seriously entertain, especially if we have change in the administration come November. But I wrote a piece for Forbes arguing that that’s not such a big deal, and I’ll tell you why. Even if the SEC were to completely fail, I think the climate reporting genie is arguably out of the bottle in the sense that there’s lots of initiatives both voluntary and mandatory in the ecosystem that will hopefully get us to a reasonable place.

Now, the downside to the ACC rules failing to become “law” would be lack of a level playing field because the EU has its own set of rules which are super prescriptive. And I often joke the EU writes a rule virtually every week, and I often joke that the EU has a system of maybe high ambition regulation, but low ambition enforcement. So there’s going to be a whole bunch of carve outs, and France will have its own thing and Germany will have its own thing and so on.

As you know, California has a similar rule. California, as you know, standalone is probably the seventh-largest economy in the world. So if you’re in the EU and if you’re in California, and if you’re a publicly district company, which is arguably the target of the SEC rule, you’re more or less covered.


Bill Loveless: I want to get into those other rules both in California and the EU as well. And I also want to talk about your Forbes piece where you called the new rule “a reasonable political compromise in an election year”. We can talk more about that in a minute. But for those who may not have been following closely, what SEC finally put out, what would be 2 or 3 of the provisions of this new rule that matter?


Shiva Rajgopal: That matter. So let’s go back to the first principles. I always like to write down what do I want from mandatory disclosure on the proverbial napkin? What do I want to know as an investor and what did I get? So what do I want to know? Fairly simple things. Do you have climate risk? Climate risk, to be granular is either physical risk, which means some kind of loss on account of fires, floods, hurricanes, and then transition risk, meaning rules that come out.

For example, the EPAs latest rule last week where they increased the MPG per car sold in the US would be an example of transition risk. Meaning does your business model, will it even survive? What happens to oil demand going forward? If most of the world is going to electric vehicles. How does that affect your business, if you’re General Motors, that kind of risk? If you don’t have either physical risk of climate risk exposure, tell me why, especially for cases where common sense would tell you otherwise.

I’d written a couple of earlier pieces in Forbes where I looked at coastal REITs, meaning REITs are real estate investment trusts which have residential property on the coast, California, Florida, Boston, New York. You would imagine that these people have physical risk, yet if you look at their disclosures, there’s nothing. So in general, I want to know, A, whether you have climate risk or not. B, if you have it, can you please tell me what you’re doing about it and how do you expect to manage it? And if you don’t have it, and if I don’t expect you to have it, I’m not worried. It’s like a two by two, right? Now-


Bill Loveless: To what extent now would this rule address those questions?


Shiva Rajgopal: Yeah, so that’s interesting. That’s where I was going next. The rule says if management thinks that climate risk is material to the company, then they’re obligated to disclose, which on the surface looks fine, but the word material is dangerous and could be interpreted differently by different people. Material to home, right? One of the biggest issues, I think, the intellectual fight between the both sides is one of horizon. Hopefully most people agree that climate risk is a problem. Is it going to affect next year’s earnings per share? Maybe not. Is it going to affect earnings per share 20 years from now? Most certainly, perhaps, yes.

So when you say something is material, what am I talking about? Next year’s earnings? 20 years earnings? Who’s holding the stock for 20 years? Then we get into all these complicated legal verbal gymnastics, and that’s where concerns have been expressed that companies for which this rule might be considered material if you are a universal owner, meaning you hold the stock for 15, 20 years or more relative to somebody who’s getting a run out of the stock maybe in a year or less.

Opinions can differ on whether this is material or not. I don’t want to call it the Achilles’ heel but a bit of a fairly significant issue, which will get debated and discussed if the rule were to come to pass. There’s a lot of excitement in the press about Scope 1, Scope 2, scope 3 disclosures, which I’m sure your audience is familiar with. I personally think that’s a massive distraction.


Bill Loveless: Explain to us what the rules would do when it comes to Scope 1 and 2 as well as scope 3. When it came to scope 3, the SEC decided not to go there.


Shiva Rajgopal: So as you mentioned, the rules would require companies to disclose Scope 1 and 2, but they’re backed off of 3 given tremendous pushback, and some of it from the Democratic side as well.


Bill Loveless: And I might mention there, Shiva, just to be clear, for anyone who may get the scopes mixed up or whatever, Scope 1 emissions cover, those sources that a company or an organization owns or controls directly. Scope 2 emissions that a company causes indirectly and come from where the energy purchases and uses is produced. Electric Power plant, for example. Scope 3 is those emissions that are down the value chain for the company, those emissions for which it’s indirectly responsible for up and down its value chain.


Shiva Rajgopal: Absolutely.


Bill Loveless: So there’s that.


Shiva Rajgopal: Yes, there’s that. Lots of political capital was arguably born in the fight about should we have Scope 3 in or out. Here’s my claim, right? If you’re an investor, do you really need to know Scope 1 and Scope 2? And to some extent Scope 3 to the last decimal point? No. I mean, do I need the associate to tell me who the big polluters are? It’s like common sense. A lot of Scope 1 and Scope 2 is a function of value add. If you add a lot of “value”, or if you produce a lot or if you have a big footprint, you’re going to have a lot of Scope 1, 2, and maybe 3 like an Amazon or an Apple.

Now, because of legal engineering, Apple’s emissions may be sitting on Foxconn’s books, which is either in Taiwan or China. The Scope 3 point. But I’m not sure if you need massive disclosure to help you.


Bill Loveless: Of what though? Of Scope 3?


Shiva Rajgopal: Of Scope 3. But even 1 and 2. It’s so ridiculously simple that I’m sometimes amazed that smart people confuse this, right? Scope 1 and 2, you produce more product. You’re going to burn more energy. You’re going to produce more Scope 1 and 2. So I can already look at how many units of products do you produce. How much value do you add. If you’re a consulting firm or a Deloitte or whatever, McKenzie, if you have a whole bunch of consultants, I can probably estimate the number of trips they take per year, and that’s going to give me some sense for 1 and 2.

So vendors, data vendors, researchers, outsiders can to some extent, which of course it’s not going to be precise, but with a confidence band of maybe five or 10 or 15% can maybe forecast what 1 and 2 is going to be, and to some extent what 3 might be. Now, 3 is a bit more complicated because companies hired a whole bunch of their operations through complex off balance sheet entities and structures.

Well, that’s a whole separate issue, which needs clarification anyway apart from the climate debate. But I don’t know why so much energy was spent on Scope 1 and 2 and 3. I don’t personally think it’s a huge concern.


Bill Loveless: And of course, again, on Scope 1 and 2, there are requirements under this rule from the SEC. It’s Scope 3 that they cut out.


Shiva Rajgopal: It’s Scope 3, yeah


Bill Loveless: They had it there originally, but in Scope 3 there have been… Scope 3 is nothing new. I mean the terminology and the reference is nothing new. Scope 3 has been referred to for what, 20 some years now, and it is reported to one extent or another in some places, right? I mean, what could the commission have done here? What would the commission have done here, say on Scope 3 that would’ve taken this a step further for investors to consider?


Shiva Rajgopal: Well, I mean, you could follow what the Europeans have asked, which is tell us all about Scope 3. Now, Scope 1 and 2 and 3 from a carbon accounting standpoint, as you know, have their own problems. There’s lots of double accounting. In an ideal world, just like we calculate value add in a value chain for say value add tax purposes, we can calculate carbon add. Conceptually, it’s no different. I often joke, we calculate and report income. Well, because we have an income tax. We calculate and report revenue and sales. Well, because we have a sales tax. Unless there is a carbon tax and unless there’s a penalty associated with under reporting borderline criminal penalty, people won’t invest in the systems needed to actually track carbon value add.

So in that sense, maybe it’s a bit of a chicken and egg problem. The only way to solve this problem, as you and I know, is a carbon tax, I think. But lack of measurement perhaps now is likely to lead to perhaps a delay in the imposition of such attacks. So what could the commission have done? They could have simply followed what the EU did in a short answer.


Bill Loveless: So we’ve seen some action by SEC when it comes to Scope 1 and Scope 2. Before we move to the implications here, is there anything else, Shiva, that the commission did that is important to point to?


Shiva Rajgopal: Yeah. I mean, there are several relatively small things which are arguably important. For example, they’ve explicitly put something in about mitigation and adaptation in terms of the dollar amount spent, which I like. There always was a provision about board oversight and risk management, which has been reiterated, but it thankfully steps away from requiring directors to have climate related expertise, which is asking for a bit too much. There were always requirements about disclosure with respect to climate goals, so-called offsets, RECs, which are renewable energy certificates.

Those are things that I like because it’s a bit of a murky world out there. And there’s a lot of financial engineering going on around carbon finance, the PPAs, the RECs. A new requirement which they’ve inserted is about severe weather events. I don’t remember saying this before. So if you have a severe drought or a wildfire, et cetera, you’d actually now tell us estimates and assumptions that affect your financial statements.

I have a small footnote on that if you’re interested. I’ll branch off a bit. So a graduate student and a fellow professor, and I did something very simple. We looked at every major disaster declared by FEMA or the NOAA. We did our best to find public companies with footprints in those regions. So if there’s Hurricane Ida, does Amazon have a distribution center in Florida or in the appropriate part of New Jersey or New York?

And then we look for some kind of footprint on financial statements and stock prices. Did stock prices change? Did earnings fall? Did cash flows fall? Did sales fall or go up? Because physical risk is not necessarily bad for every company. By and large in the public domain, meaning publicly listed company domain, we’re finding nothing. We are finding some action in the private domain, but private sales data is difficult to get, et cetera. So subject to the quality of that data.

Where am I going with this? I think this is another example of a situation where lots of political capital has been burned on arguably the wrong target. Public companies don’t really perhaps have a big physical risk problem in the US. They’re either rich or they have tremendous systems. If Amazon has a problem in Kentucky, they’re going to reroute shipments from, say, the Virginia, DC or something. So they have either information systems and/or they’re [inaudible 00:17:56] and/or they’re tubing for this to matter.

The action perhaps lies in the sector that’s not even covered, which is the “unorganized sector”, let’s call it. If there’s a massive weather event in Brooklyn, the sandwich shop doesn’t sell sandwiches for three days. Amazon doesn’t really care. It just asks its employees to work from home. And that’s the sector that nobody’s talking about. So most of the rulemaking has focused on publicly listed companies.

So what comes out of that research as a footnote to the severe weather requirement of the SEC is that maybe we should be worrying more about smaller companies, non-public companies extend that point further to households, governments. The government of Florida has been borrowing money effectively to subsidize insurers so that they stay in the state. Now, it doesn’t call them insurance bonds, so you need to know a little about the public finance to link these two events. But I’ve always been fascinated by on whose balance sheet do these losses lie? These are climate losses. And I’ve looked forever in the publicly listed space, and I’m beginning to think that was a mistake. That’s not where the action is, it’s elsewhere.


Bill Loveless: But boy, it would be so difficult to collect the information from those, maybe not from a state, but certainly from companies and small private companies, right?


Shiva Rajgopal: Well, not so much, Bill. They all pay taxes. If somebody is clever enough, maybe that’s our next step. We could take these severe weather events and start looking at what kind of sales tax receipts did we have in Brooklyn? I mean, you can’t probably, but you could with enough digitization, drill down to that sandwich shop as long as it doesn’t sell stuff in cash, of course, in which case it doesn’t get recorded.

But my worry is that you’re perhaps looking at the wrong places for physical risk. For transition risk, I fully understand it. This is a big event. So for example, it’s the big car makers who probably get affected by transition risk. So when I think about transition risk, again, I’m a simple person. I like to think about concrete things. If you look at say, Exxon’s scenario analysis, how will oil and gas production change over the next 30, 40 years?

Who knows? BP has its own forecast. Exxon has its own forecast. The IEA has its own forecast. So I teach this in class, and I’m usually telling the students, I really have no idea how to think about this. But if you think about transition risk for say, one sector, the auto sector, you can look at rules. Then you could probably go and trace what happens to the production plans, stock prices, cash flows, future prospects, then suddenly things start to make some sense.


Bill Loveless: Will that information be available thanks to this rule that SEC has put out on the street now?


Shiva Rajgopal: I doubt it. People will do the bare minimum and unless the analysts push them. And again, a lot depends on horizon. Let’s not discount that factor. If you’re a sell-side analyst, who’s thinking 30 years ahead? Nobody. One of the nice things about that Exxon scenario analysis is that companies would never tell you what they’re going to do 30 years from now. Maybe because of this climate phenomenon, we are now forcing them to think that far ahead. And maybe that’s an unintended benefit of this whole exercise. It might actually make them think harder about business plans in general.


Bill Loveless: Yeah. When we talked two years ago when this rule came out, you left me with the impression you thought it was a good idea that something would come of it. Do you still feel that way? I mean, do you feel that there’s first a need for the government regulator to take this sort of action? And to what extent do you think that it does matter?


Shiva Rajgopal: I’m blown away by the pushback. So if you were to view the trade-off as the amount of political capital spent versus what I got from it, I’m almost inclined to say it wasn’t a good idea.


Bill Loveless: Interesting.


Shiva Rajgopal: Because you said this yourself, 24,000 comment letters for something that’s relatively innocuous, right? I mean, the other side… I don’t want to say it’s the other side. Again, I’m political independent. Some Republicans weaponize this. It acquired a life of its own. We had two presidential candidates running on the platform of ESG investing, which even insiders don’t fully understand. What is ESG? I’m talking about Vivek Ramaswamy and DeSantis, and to some extent Mike Pence.

On the flip side, you may argue this actually prompted others to act or encouraged others to act. The EU idea. Even if you look at the several sections and departments of the US government. The DOD has its own version of a climate rule. The Fed is talking about some kind of stress testing. So maybe it encouraged the ecosystem to act. But in terms of the cost benefit analysis from the SEC standpoint, in terms of the political capital burn, the final role is a bit of an anti-climax.

And hence my earlier comment about political compromise, because at the end of the day, this is I think the strength of our system unlike the EU. In the EU, I mean, I’ve seen some comment letters, but where is this robust back and forth? Where is this debate about what should we do as a society about climate change? Maybe there is consensus. Could be the other hypothesis. Maybe in the EU everybody agrees. I somehow doubt that. I think the messiness of our rulemaking, if I wanted to be a contrarian, could arguably be viewed as a strength.

Bill Loveless: Yeah. Well, I mean there certainly were those who said that there was… I acknowledged all the politics involved in this issue. I recall a quote from Alison Herren Lee, who was the former acting chair and commissioner at the SEC who had championed really called for more climate related disclosures. She told the New York Times that, “Thanks to corporate lobbying disclosure of the very real financial risks from climate change has fallen victim to culture wars.”

She was disappointed as were others who were hoping for a much stronger action by the SEC. And of course, as you noted, there’s those on the other side who felt the SEC had taken a step too far. And in fact, as you noted, it was only a matter of days before the rule was addressed by a court because of those who opposed it. You say maybe it contributed to the more broadly to actions taken elsewhere, for example, in California and the SEC or California and the European Union. I mean, how do the actions that the EU in California has taken compared to what SEC was attempting to do or what it did now or what it was attempting to do originally?


Shiva Rajgopal: Well, the California and the EU role are certainly more ambitious, expansive, and I’m sure I’ve said this in our previous conversation. Sometimes the opponents of the rule have to be careful that they don’t overreach because EU, and maybe the state of California will then become your defacto rule maker.


Bill Loveless: Yeah. We’ve seen this with fuel efficiency regulations for light vehicles.


Shiva Rajgopal: It’ll become worse in the sense that you’ll have a red Citi bank and a blue Citi bank very soon. There’ll be a whole bunch of the red states keep doing their thing, and the blue states will do their thing. And then if you’re a national company, which most of the large companies are, this is a huge headache in terms of interstate commerce. I’m no liar, so I don’t even fully understand the legalities of if this was even okay or possible, but it looks like that’s what we are seeing, right?


Bill Loveless: Yeah.


Shiva Rajgopal: We’re seeing a whole bunch of rules. For example, Alabama and it’s IVF thing. If you are thinking about locating an office there and you want to hire millennials, who’s better go work there, for instance?


Bill Loveless: Well, I mean, that’s the argument for action on the federal level for the SEC to take some actions here.


Shiva Rajgopal: So I think the cost of the SEC’s big rule, as I said earlier, is lack of a level playing field. So the EU will do its thing. California will do its thing. So we’ll have a messy patchwork of rules and different jurisdictions. Perhaps maybe another domains, they’re going to see some red state rules and blue state rules. It makes the administrative costs of running a business much higher as somewhat regrettable.

I mean, at the end of the day, if there weren’t as much politics associated with this rule, it might have even been a bit of a non-event frankly. 30% of companies already disclosed some kind of climate risk data. Of course, the quality varies a lot. Some are fantastic, some are absolutely horrible. So the role if it was stronger might have added some uniformity, some kind of minimum standards. It might still happen, but that’s the cost of all the politics.


Bill Loveless: Yeah. Well, it seems as though the California rule is pretty stringent. I read that under this California regulation, companies that operate in the state and make more than $1 billion in revenue annually would begin reporting their emissions data in 2026, and it would affect more than 5,300 businesses, including Apple, Google, Microsoft. And then there’s a second disclosure rule for companies with more than 500 million in annual revenue, and they would have to divulge how climate change threatens their businesses.

I read where those disclosures would begin in 2026, as would the first one. Both of those regulations would begin in 2026. So it seems like it’s pretty stringent. I’m not quite sure how it compares exactly to what the SEC was looking for, but it goes pretty far.


Shiva Rajgopal: It goes pretty far. Again, I’ve not kept in touch with the legislative challenges to that rule, but I’ll be surprised if that doesn’t get challenged as well.


Bill Loveless: And there’s Scope 3 there too, right?


Shiva Rajgopal: And there’s Scope 3.


Bill Loveless: With California rule in terms of the disclosure. So they did go that far. I guess there is a question whether those deadlines will stick. Even California Governor Gavin Newsom has questioned those deadlines and his new budget for the state apparently doesn’t include funding for those new initiatives.


Shiva Rajgopal: The other worry from a disclosure standpoint is that people will write a standard boilerplate paragraph drafted by an audit firm or a law firm. Yes, climate change could potentially be an issue, blah, blah, blah, end of conversation. Is that actually going to push people to think hard about the next 20 years? This is a slow moving disaster. We are fighting a horizon problem.

The average CEO stays in the job for six years. The average CFO stays in their job for four years. The board usually hangs around longer. The science is evolving, to be fair. Transition risk is real because that’s policy driven. So you can at least follow what the EPA is saying and so on. But otherwise, nature is going to take perhaps a while and there’s so much distrust of climate science in the red states and so on. So even if you write a rule though, where I’m going with this is what kind of disclosure will you actually get?


Bill Loveless: Yeah. I guess some would say you need to start someplace, huh?


Shiva Rajgopal: Yeah, maybe.


Bill Loveless: I should note we’ve been talking about the EU. It has its so-called Corporate Sustainability Reporting Directive that will introduce more detailed sustainability reporting requirements for EU companies, non-EU companies, those that meet certain threshold. And companies with securities listed on a regulated EU market, those rules began phasing in January, this past January, and will be fully implemented by January 1, 2028. So there you go with the EU.


Shiva Rajgopal: If you’ve looked at the details, frankly, I’m an accounting professor and I should like disclosure, but it’s massive over working seriously. This is what I was referring to earlier. Maybe our system looks like a total mess. Maybe it’s not such a bad system because we actually think hard about the rules, and there is usually debate from the other side on why something is a bad idea. And that’s worth listening to, and it’s important to incorporate that feedback.

I can think of cases where people will produce a whole bunch of data. The consultant industrial complex is super happy because they’re fully employed thanks to the EU because it’s a compliance job. To what end? What am I going to do with this? If this is purely meant to help investors, can somebody show me a reasonable model linking some of these KPIs or data points to some future cash flows perhaps? None of that seems to have come up. I mean, this is elementary common sense, but this won’t get through here, right?


Bill Loveless: Shiva, say there was a magic wand and you suddenly were chairman of the SEC and you had a majority there. I mean, what would you have done differently?


Shiva Rajgopal: Oh, I would start with the reporting model. Maybe this is beyond the scope of the show, but let try and motivate what I would think I would do. That’s why you never want to give me power. So here’s what I often tell people in my class. Think about what you teach in a high school economics textbook. How do companies create value? It’s some combination of materials, labor capacity, managerial talent. You take that framework to a modern income statement. It’s a six line income statement which has remained more or less the same for the last 60, 70 years. I don’t know where material costs are. I don’t know where labor is.

People don’t tell me a lot about capacity in terms of what they need to spend to stay where they are. There’s very little conversation about human capital or managerial talent. So there’s a lot of disclosure, but it’s a lot of disclosure of the useless kind. In today’s economy, nobody invests in brick and mortar anymore. We’ve become highly intangible, heavy. Very little discussion about how intangible assets are being managed, created. And frankly, this actually affects the quality of management inside as well. Because you don’t book an intangible asset, it’s considered immaterial. The auditor doesn’t care.

Does management itself know how? Is it spending money on human capital, for instance? So the reporting model itself is so badly broken. I would go fix that first. And I often joke, there’s like a $40 trillion coalition pushing for climate disclosures. You must have seen this in the footnotes of the SEC. When was this $40 trillion? First of all, there’s not even $1 trillion of AUM. Worried about what shows up in a 10K, which is the other issue we have. There’s so much passive investing.

People have almost given up trying to worry about what should show up in a set of financial statements. It’s become a compliance kabuki, which is such a tragedy because long-term active as an asset class is dying. And who cares about idiosyncratic value creation? It’s usually the long-term active. If you’re a passive investor who holds the whole world, if you’re BlackRock or Vanguard, you probably hold the whole world literally. You have no time, no interest in actually figuring out some of these things.

So that $40 trillion coalition itself is a political coalition. Is it backed purely by valuation and science and fundamental analysis? Not so sure. So that’s why I said you don’t want to even go there. Don’t give a magic wand. I have to fix something more fundamental.

Bill Loveless:

Well, as you know, all of this comes as there’s been pushback over the business world’s embrace of environmental, social, and government’s principles, ESG. And that includes Republican lawmakers. And in recent weeks, more financial firms have walked back their own climate commitments suggesting that political pressure was having an effect. In your Forbes column, you asked rhetorically, is this a defeat for the ESG community? Is it?


Shiva Rajgopal: No. I often joke, don’t call it ESG, call it MAGA. And why do I say that? Of course, depending on who I talk to, sometimes people don’t even get the joke because the labels are important. The underlying questions don’t go away. The underlying questions that the ESG movement raised, as I said in my piece, were at least three big ideas. One, when you talk about macroeconomic growth, the first thing we write down in the production function is natural resources.

China has a lot of natural resources, Japan doesn’t, so it tries to find a way to get around that to do imports and blah, blah, blah. When we come to the micro level for a company, say a Pepsi or a Coke, we never discuss natural capital. So that’s the first big glaring problem that I think the ESG conversation clarified, at least in my mind. We set the cost of national capital in our income statements to zero.

I don’t know how to measure national capital and value it correctly, but I know the value is not zero. The second point the ESG movement discussed was the role of externalities. What is the role of business in societies? Businesses create both positive and negative externalities. We’ve discussed negative externalities a lot like emissions and pollution. They also create positive externalities. Businesses in fact, arguably exist to create positive externalities. They often discuss Pfizer as the example where Pfizer made a lot of money because of the COVID vaccine.

But they saved society a lot of money by getting us back to work early. That’s a massive value add by Pfizer, and frankly, governments may not have been able to invent that vaccine or distribute it as quickly. Arguably, the government regulator, in fact delayed approving the vaccine for a while. And the third point is when the link between the manager and the owner gets dissipated or interfered with, capitalism has a hard time functioning.

And that’s I think, what we are seeing because of passive investing. So these are at least 3 big ideas in my mind that the ESG movement put forward. These questions are not going away. We were never teaching these things in our classes five or six years back. Now, we do. There’s robust debate on conversation. All this to me is progress. And most important, I say this over and over again, there’s a lot of legacy money going to our next generation by way of inheritances and so on.

Whether it’s right or wrong, they care. So selling these, so-called ESG funds, the asset managers are very smart because they’re creating a product for the next gen. And in terms of recruiting, a lot of our students would arguably like to work for a company that’s seen as sustainable or green if they had two similar choices.

You can argue product differentiation. A green or a sustainable brand arguably can be sold at maybe five, 10% more. So there is something in the movement. It has legs. So it’s not necessarily a setback. I think we are obsessed reporting as our theory of change, which in my mind is a completely silly idea. Let’s say you have all the reporting tomorrow. What is going to change? Nothing. You need a carbon tax. You need consumers to start becoming a bit aware, because when people go after oil companies… I often say this, they don’t sell drugs. They sell stuff that you and I want, or consume.

How much fossil fuel am I wearing today? I’m wearing a Patagonia jacket, which I’m sure is made of polyester. So how about consumers? No politician wants to have that conversation. These are interesting questions that I would’ve never thought about before I went into researching. So I think it’s not a setback.


Bill Loveless: Yeah. You’re not a lawyer, but you study these things.


Shiva Rajgopal: Certainly not.


Bill Loveless: You study these things pretty closely, and I’m sure you talk to people in the law school over there at Columbia, Michael Gerard, and others. Do you think this SEC rule can withstand legal scrutiny? As we’ve seen in the case of the Environmental Protection Agency, the Supreme Court has put limits on agency’s discretion in adopting new regulations.


Shiva Rajgopal: I think this version could because they leave the definition of materiality to the issuer, which has problems, and then they try to stick closely to the knitting in terms of material impacts on cash flows, material impacts on asset values or liability values. I mean, in my naive understanding within the realm of the SEC, they don’t stray too much into social policy. They say, “If you have a climate goal, you should disclose.” Now, you could argue there’s reflexivity because there is a rule which says if you have a goal, you have to show some stuff. People won’t have a goal. But let’s set that aside.

So to respond to your question, I would say perhaps yes. Is this any different from any other financially material event? Well, no. Why is it any different from any other event? Now, having said that, there’s a conflict minerals rule, which was argued, was unimplementable. It’s very hard to trace the supply chain of what kind of stuff you’re buying. So maybe the new version, I would argue, hopefully can, but standard legal challenge, the older version may not have. So in that sense, again, going back to my earlier point, it’s a reasonable compromise. At the end of the day, you don’t get everything you want. And arguably a rule that both sides hate is perhaps a good rule.


Bill Loveless: And that certainly seems to be the case with this one. Well, Shiva Rajgopal, you’ve got plenty here to discuss with your students at Columbia as well as investors outside of the university and for your own ongoing writing in Forbes as well. Thanks for coming on the Columbia Energy Exchange to talk about this new SEC rule.


Shiva Rajgopal: Thank you. Thank you. Thank you, Bill. Thanks for doing this. Thanks for inviting me, and it’s always fun to exchange ideas with you and your audience. Thank you.


Bill Loveless: That’s it for this week’s episode of Columbia Energy Exchange. Thank you again, Shiva Rajgopal, and thank you for listening. The show is brought to you by the Center on Global Energy Policy at Columbia University School of International and Public Affairs. The show is hosted by Jason Bordoff and me, Bill Loveless. The show is produced by Erin Hardick from Latitude Studios. Additional support from Lily Lee, Caroline Pitman, and Kyu Lee. Roy Campanella is the sound engineer.

For more information about the show or the Center on Global Energy Policy, visit us [email protected] or follow us on social media @columbiauenergy. And you can rate the show on Apple or Spotify. You can also let us know what you think by leaving a review. And if you really like this episode, share it with a friend or a colleague. It helps us reach more listeners like yourself. We’ll be back next week with another conversation.

On March 6, the U.S. Securities and Exchange Commission (SEC) adopted new rules to standardize climate-related disclosures for public business and public offerings. Hoping to provide investors with consistent and comparable information, the Commission’s new rules require companies to disclose emissions and the expenses and losses associated with climate risks in annual filings and reports. 

But critics immediately balked at the rules, questioning its legality and effectiveness. 

So, how does the SEC define climate-related risks? How do their disclosure requirements compare to similar rules passed in the EU and California? And what are the critics saying? 

This week host Bill Loveless talks with Shiva Rajgopal about the SEC’s climate disclosure ruling and his Forbes column on the topic, “The SEC’s New Climate Rule Is A Reasonable Political Compromise In An Election Year”.  

Shiva is the Kester and Byrnes Professor of Accounting and Auditing at Columbia Business School. His research interests span financial reporting, earnings quality, fraud, executive compensation and corporate culture. From 2017-2019, Shiva served as the vice dean of research for Columbia Business School and has been a faculty member at Duke University, Emory University, and the University of Washington.


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