By: Lesley Hunter
July 11, 2022
Long informed by a disaggregated system of corporate Environmental, Social and Governance (ESG) disclosures and ratings, the methodologies behind ESG investing are evolving to streamline decision making, improve impact, and further mitigate climate change.
Consolidation among ESG standard setters and new financial regulations are driving these changes: as voluntary frameworks merge into the International Sustainability Standards Board (ISSB) and jurisdictions begin to regulate ESG definitions, corporate sustainability disclosures, and climate risks in the financial system. If done correctly, the standardization of corporate sustainability information presents a significant opportunity to direct more ESG-motivated investment into results-driven companies.
In the U.S., the Securities and Exchange Commission (SEC) is expected to release a final rule this fall that would require corporate climate-related disclosures in SEC filings. This regulation is intended to help investors access consistent, transparent, and forward-looking information on climate risks, greenhouse gas (GHG) emissions, and climate solutions.
Renewable energy generation, use, provision, and investment are material considerations and strategic business decisions in company climate transition plans. Renewable energy helps companies meet global climate targets while also reducing their exposures to GHG emissions-intensive activities, improving their long-term financial performance, and responding to growing customer demand.
It is critical to ensure that, as the definition of what qualifies as “sustainable” evolves, companies are recognized for their role in the energy transition. The American Council on Renewable Energy (ACORE) – on behalf of its member companies that collectively hold more than $25 trillion in assets – filed comments with the SEC on June 15 to underline ways its proposed rule on climate disclosures can properly recognize the role of renewable energy in corporate climate strategies while avoiding suboptimal climate, financial or environmental results. Key aspects of these comments are summarized below.
The SEC should define Renewable Energy Credits (RECs) as legal instruments to reflect the role they serve in U.S. markets, with particular disclosure of the type of RECs relied upon in a company’s climate strategy
The SEC has proposed rules that would require registrants to disclose information about their use of RECs in their company climate strategies and targets. A renewable energy credit is a legal instrument that represents the environmental and nonpower attributes of renewable energy generation. REC ownership is how companies in the U.S. make credible and verifiable renewable energy usage claims, and may be used to address Scope 2 GHG emissions associated with purchased electricity.
Companies have diverse options available to procure renewable energy and acquire RECs, such as through power purchase agreements (PPAs), unbundled REC purchasing, green tariffs and 24/7 purchasing approaches, but options may be limited based on the power market in which the company operates. These methods serve unique functions and have differing impacts on reducing GHG emissions. The SEC proposed rule does not differentiate among the various sources of RECs or recognize the source of the legal instrument creating the REC, which affects the substantiality of the carbon claims of emissions reductions.
The definition of a REC should be revised to include disclosure of the type of “legal instrument” that creates the REC associated with the generation and procurement of renewable electricity. By requiring fuller disclosure of the type of REC relied upon by a registrant, the rule will provide a more transparent view of how a company is contributing to durable carbon emission reductions without discounting the critical role of renewable energy procurement in company sustainability strategies.
If companies acquire RECs to achieve a climate-related target or goal, the SEC could require the registrant to disclose certain information about the RECs, as proposed. Disclosures could consider the type of “legal instrument” that creates the REC associated with the generation and procurement of renewable electricity, as described above, and the GHG emissions reduced as a result of REC usage. This transparency will ensure integrity and an equal playing field for registrants.
GHG disclosures should reflect the needs of investors
Scope 1 and 2 GHG emissions reporting is well-developed and already disclosed by many market participants through the GHG Protocol’s framework. While a growing number of companies have begun disclosing Scope 3 emissions, certain industry sectors have reported that the current systems for collecting and reporting Scope 3 disclosures are not mature enough to be subject to regulation. To enable greater value chain emissions data collection in the electricity sector, ACORE supports the disclosures of market-based Scope 1-2 emissions and of the GHG emissions associated with the purchased electricity of load-serving entities.
ACORE supports both location and market-based Scope 1-2 emissions disclosures. Market-based disclosures better encompass supplier-specific data, which provides more granularity on the environmental impacts of purchased power compared with the location-based method of Scope 2 emissions reporting.
Additionally, more consistent emissions data is needed from load-serving entities about both their owned generation and purchased electricity. It is currently challenging for financial institutions to assess client procurements in the electric utility and competitive electricity retail sector in a holistic way. Some companies provide GHG information voluntarily and do not consistently report on purchased generation through power purchase agreements. Many major utilities and competitive electricity retailers procure renewable power through PPAs, but their emissions data may or may not reflect such power contracts, and municipal utilities and rural co-ops often decarbonize through PPAs and not through their owned assets. Investors do not have the data they need to show how utility strategies would translate to their own Scope 3-related targets. Through more consistent disclosures of the GHG emissions of generator-owned and purchased electricity, financial institutions can better account for the emissions attributable to their financing beyond the current voluntary, patchwork disclosure environment.
Investors should be permitted to disclose the climate opportunities provided by and avoided emissions associated with direct renewable energy investments
Companies invest in renewable energy both as a strategic business decision and a method to achieve decarbonization objectives. The U.S. renewable energy sector has attracted over $425 billion in investment over the last decade. Debt and equity providers continue to show strong confidence in the renewable energy sector even as financing mechanisms have evolved to meet the capital requirements of renewable energy projects. Renewable energy investment is thus a key demonstration of companies’ commitments to benefit from climate opportunities.
The SEC should permit and, indeed, encourage companies to discuss climate-related opportunities as proposed. It is our recommendation that, to provide the clearest picture and utmost transparency, while not discouraging investment in the creation of new renewable energy, the SEC should include the reporting of direct investments in renewable energy projects as a climate opportunity. This will afford investors the option to report these investments and their impact in a transparent manner in climate-related disclosures.
Along with their gross GHG emission disclosures, investors also should be allowed to disclose the avoided emissions associated with their investments in renewable energy while avoiding concerns around double counting. Banks and capital providers are accelerating their investments in renewable energy. These investments extend beyond the operational carbon footprint of the investing company and contribute to GHG reductions in other sectors of the economy. The downstream impacts of their investment activity could provide tremendous future GHG savings in the form of avoided carbon emissions. Other investors could benefit from avoided emissions information if they seek to invest in companies that are driving capital to renewable energy.
ACORE supports the SEC’s objectives to help investors access consistent, transparent, and forward-looking climate-related information so they have appropriate knowledge of climate risks, greenhouse gas emissions, and climate solutions. By considering how companies are using, investing or generating renewable energy, climate disclosures can reflect the important role the private sector plays in advancing the energy transition.