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Is Fashion Ready for SEC’s Carbon Disclosure Mandate?

Climate scientists are warning that the window of opportunity for averting the worst impacts of human-caused global warming is rapidly closing. A new U.S. Securities and Exchange Commission rule that would require businesses to report, for the first time, their greenhouse-gas emissions, along with any risks climate change might pose to their bottom lines, could help push the issue front and center.

Many companies already do this on their own, which makes the proposal far from groundbreaking, but it is significant because it will create a consistent, reliable and comparable framework for investors and issuers to make informed decisions, said climate change lawyer Rick Saines, who received France’s national order of merit for helping make the watershed 2015 Paris Agreement a success.

Another effect the measure will have, he said, is reframing carbon disclosures not as something to be ballyhooed once a year in a sustainability report but as a critical line item in a company’s accounting. And that’s something that is long overdue in corporate America, which has long lagged behind its European counterparts.

More than ‘marketing collateral’

“Most of the sustainability departments originated out of marketing, and the sustainability reports were primarily a marketing collateral piece,” Saines said. “And in a sustainability marketing context, there’s been a lot of guesstimation and proxies for data. So it’ll be interesting to see how companies have to internally respond to this because, in some cases, even though they’re already reporting on this type of information, they’re probably going to need to do it in a more robust way now.”

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There is no shortage of ESG frameworks, though there are “differences in teeth” from one to the next, said Simon Geale, executive vice president of procurement at Proxima, a supply chain consulting firm. While there are “pockets of commonality” among them, and even different regulations in different countries aren’t all that different, setting some common standards will go a long way toward streamlining efforts and creating a level playing field. “Everyone wants to know that they’re making the right decisions based on common information,” he said. Even investors now have net-zero commitments because, like BlackRock, they recognize that climate risks are investment risks.

No one will be surprised by this regulation, Geale said, though fashion companies will have different degrees of readiness. “It’s a big challenge, particularly when you’re doing low-cost-country sourcing [and] low-cost-country production,” he said. “You’ve got complex supply chains. It is a big challenge to go and solve; to just suddenly switch on a data flow—that’s not going to happen.”

It’s likely for this reason that the SEC is suggesting a phased-in approach, with the requirements taking effect at the earliest in the fiscal year 2023, meaning they will apply to SEC filings in 2024.

The agency appears to be drawing its guidance from the Task Force on Climate-related Financial Disclosures, one of the most widely adopted frameworks. According to the proposed rule, filers will have to disclose their own direct and indirect greenhouse-gas emissions, known as Scope 1 and 2 emissions, as well as those generated indirectly by suppliers, known as Scope 3 emissions, though there will be exceptions for materiality and company size.

For fashion firms, however, Scope 3 emissions are nothing if not material, accounting for 80 percent to 90 percent of their total footprint, if not more. The CDP, the not-for-profit previously known as the Carbon Disclosure Project, estimates that Scope 3 emissions are, on average, 25 times as intensive as Scopes 1 and 2 in the apparel sector, versus 11 times in others.

It’s in Scope 3 that most of the perils—both in terms of measurement and reporting—lie. The majority of clothing purveyors have limited visibility into their supply chain beyond the first tier. A mere 19 percent of brands, retailers, suppliers, manufacturers and sourcing agents in the Asia Pacific, North America and Europe claim to have full visibility of all stakeholders operating across their entire supply chain, according to a recent KPMG and Serai survey. An even smaller proportion—15 percent—claimed full traceability of the materials used to create their products. If the disclosure requirement pushes through, businesses that fail to thoroughly map their impact could open themselves up to securities fraud litigation.

“The counterargument to be made is that because companies aren’t necessarily in a position to even determine what those climate change risks are, are you potentially harming investors by asking companies to stray away from their area of expertise and mandate?” said David Sacco, executive director of business consultancy NewTech Haven and an adjunct professor of finance at the University of New Haven. “Even for things like climate and carbon use, letting the free market determine [what] is the best way to do it because you’re incorporating the actual needs and desires of everybody participating in an economy as opposed to just the wishes of certain policymakers.”

Bad data in, bad data out

But regulating companies is important because “forward-thinking players” tend to be in the minority, said Maxine Bédat, director of The New Standard Institute, a “think and do tank” that uses data to promote accountability in the fashion industry. Only 100 fashion companies have approved Science Based Targets or commitments to set them.

The Fashion Sustainability and Social Accountability Act, a New York bill that The New Standard Institute backs, aims to go further than the SEC by requiring large companies conducting business in the state to also reduce their emissions in line with the Paris Agreement. Disclosure and action go hand in hand because the latter is predicated on the former, she noted, but mitigation must be the ultimate goal.

One thing the SEC proposal would help with, however, is collecting better data, one of fashion’s biggest blindspots. Getting a sharper understanding of where the worst emissions occur will also help better channel reduction efforts, say in terms of financial incentives for suppliers to make energy-efficiency improvements. It might even put to bed questions like how much the fashion industry contributes to global pollution.

“If we do not rely on primary data and are only relying on LCAs, it’s like bad data in and bad data out,” Bédat said. “And we won’t be able to have much confidence in that information.”

Trisha Dello Iacono, director of sustainability at the American Apparel & Footwear Association (AAFA), which represents household names such as Adidas, Gap and J.Crew, said that the trade group is still poring over the details of the proposal but welcomes the effort.

“I think the focus on reporting and measuring emissions is really important, since you can’t reduce what you don’t report and so this will help develop a single approach framework for reporting and hopefully reducing our emissions,” she said. “It’ll allow the industry to sing from the same song sheet, so to speak.”

Reducing carbon emissions, Dello Iacono told Sourcing Journal, is a pre-competitive issue, and a collaborative one at that, which is why she appreciates the SEC giving companies the opportunity to comment through May 20.

“I think it’s pretty obvious that we all need to move in this place of reducing our emissions, of tracking them, especially after the latest IPCC report showing that we need to triple our action on this effort,” she added. “I know many of our members, as well as AAFA, will plan on submitting comments and have the opportunity to weigh in on the proposal itself.”

Danny Ralph, chairman of Risilience, a climate change risk-analysis platform, recognizes that the SEC measure will be a disruptive one and not just in fashion, but said companies must grapple with the notion that they are responsible for their entire supply chain ecosystem sooner rather than later. The SEC proposal, after all, is just one piece; with the European Union’s draft directive on corporate sustainability due diligence and human-rights and environmental due diligence laws coming down the pike in Germany, Spain, the Netherlands and Norway, companies will only become more culpable.

“So the initial investment track is quite costly, especially the shorter the time period is, but these are only things that we should be doing anyway. And if you look at how much it costs to report annually, it’s fractions of a percent of the profits,” he said. “Some guardrails are important, and investors need this desperately. It’s going to be a big upheaval but we’ve been through other big upheavals.”