Wear It With Pride: Why we welcome the SEC scrutiny of offsetting

6th April 2022

Vaughan Lindsay, CEO of Climate Impact Partners, responds to proposed rules from the Securities and Exchange Commission (SEC) for climate-related disclosure by U.S. companies.

Finally, to the applause of many and concerns of some, the Securities and Exchange Commission (SEC) has published its proposal for climate-related disclosure by U.S. companies.

I won’t add to the comprehensive analysis of what’s in there but point you to this short fact sheet and this good summary from Trove Research.

The new rules should have a seismic impact when it comes to corporate transparency and accountability around climate change. Over the past year a tsunami of corporate pledges and commitments have dominated the corporate landscape paired with increased scrutiny around the impact of those promises.

Our research shows that between 2020 and 2021 the number of 2030 commitments made by Fortune Global 500 companies – the largest cohort of which is based in the U.S. – increased eight percentage points reaching nearly 40%.

Of particular interest to me, unsurprisingly, are the proposals for transparency about the use of carbon credits for offsetting and Renewable Energy Certificates (RECs):

If the registrant has used carbon offsets or RECs in its plan to achieve climate-related targets or goals, it would be required to disclose the amount of carbon reduction represented by the offsets or the amount of generated renewable energy represented by the RECS.

While some may see this as a concern, risking a slap on the wrist for companies that offset emissions, I see it as entirely positive. A company that offsets emissions is going beyond regulated requirements, raising its ambition to meet stretching targets and delivering meaningful action today while they plan for longer term change.

By offsetting residual emissions companies take full responsibility for their footprint and immediately put a price of carbon into their business – and with the price of carbon credits rising that is a meaningful price – which incentivizes greater internal change.

Research with CDP has shown that businesses which offset emissions make greater internal changes than those that do not. And a high-quality offset strategy directs private sector funding to external projects that are critical if we’re going to meet our 1.5 degree goal and transform our global economy, often working with communities suffering some of the most severe impacts of climate change. Why wouldn’t offsetting be stated with pride?

Of course, it’s essential that companies see offsetting as only one part of a carbon management strategy – we need clear and ambitious science-based targets and internal changes combined with projects delivering immediate results, and the investments and business changes that will deliver results in the future. Clear and direct guidance around the use of verified and measurable offsets can help companies more accurately represent how this tool fits into a larger ESG strategy and reporting, and I welcome it.

It may have taken a while to arrive, but the SEC’s ability to help improve transparency around the use of offsetting is an opportunity. It can benefit those already making ESG a priority, but, more importantly, perhaps it will entice action from the nearly 60% of Fortune Global 500 companies that have yet to make a 2030 commitment.

The latest IPCC report made abundantly clear that overshooting on climate targets is not an option and investments must be made now so we don’t erase the biodiverse ecosystems and natural resources essential to a healthy planet. That requires action from everyone, using all the solutions available, and there isn’t a minute to waste.