The prospect of SEC emissions disclosure is already boosting carbon-counting startups

The era of voluntary climate reporting in the US may be coming to a close.

In late March, the SEC proposed a rule that would require companies to disclose climate risk, both their emissions and their plans to meet any reduction goals they have set publicly.

This proposal is the culmination of years of investor and consumer pressure and would bring the US in line with reporting requirements in place in Europe since 2018.

“The SEC has been talking about this since the 70s,” Kristina Wyatt, deputy general counsel and svp of global regulatory climate disclosure at Arizona-based climate management and accounting platform Persefoni and former senior counsel for climate and ESG at the SEC, told Emerging Tech Brew. “Investors want better information. They want more reliable information. They want more consistent information than what they were getting. They don’t want greenwashing.”

Raising climate reporting standards to the level of financial disclosures would force companies to find a more standardized, verifiable approach to measuring and disclosing their footprints. Carbon accounting software companies want to help with that. The SEC is still seeking comments on the rule, and it likely won’t be implemented until 2024 if it passes. Even so, climate software firms say the proposal is accelerating the growth of their customer base, though the companies we spoke with declined to share specifics.

“We track why people come to us, and we had to create a new category, which was the SEC ruling. Particularly companies where you see, for example, a chief legal officer being the driver of the ESG strategy. Where they’re acting more from a point of risk rather than a point of opportunity, necessarily,” Mauro Cozzi, co-founder and CEO of London-based carbon accounting firm Emitwise, told us. “The chief sustainability officers, those were already in the pipeline.”

Climate software boom

The SEC requirements would raise the bar on what’s expected from public companies in the US in terms of climate disclosures. Right now, the companies that report emissions tend to calculate high-level estimates by relying on generic emissions factors (e.g., an estimate for a given activity, like operating a fleet of gas-powered vehicles). Then, they typically share that info in annual reports, on a voluntary basis.

But only about one-third of public companies in the US currently disclose their emissions, the SEC estimates, even though companies listed on stock exchanges globally account for about 40% of all greenhouse-gas emissions, according to Generation Investment Management.

“I think you’re going to see [the SEC rule] drive this shift from once-a-year consultant PDFs to, you now need a system of record to manage carbon within your company,” Taylor Francis, co-founder of San Francisco-based climate software startup Watershed, told us.

Even before the SEC’s proposal, investment had been flowing into companies working on software platforms that help with carbon accounting and measurement. Carbon accounting companies raised at least $297 million in 2021, six times as much as in 2020, according to a Reuters analysis of PitchBook and Climate Tech VC data.

Emitwise has raised nearly $17 million since its founding in 2019. Watershed has received $70 million in funding since it was founded in 2019. Sweep has raised $100 million just in the last 12 months, including a $73 million Series B in April. Persefoni was founded in 2020 and has raised $114 million since then.

Generally, these firms provide data analytics platforms that aim to help companies streamline the carbon accounting process, pinpoint areas where they need to cut emissions, and track progress on reduction goals. Most climate software startups use databases with thousands of emissions factors and help collect more detailed information about the footprint of suppliers. Some, like Emitwise, use machine learning to fill in the gaps.

Precision will be a process

The basic framework for carbon accounting is already well established. Companies use the Greenhouse Gas Protocol, which was developed in the late 1990s, and provides a methodology for how to measure emissions, and the Task Force on Climate-Related Financial Disclosures standards, which dictates how to report the numbers.

Following these guidelines leads to climate disclosures that can be compared across companies in theory, but in reality, there is still plenty of room for interpretation, Cozzi said.

“What this world doesn’t have yet, necessarily, is the equivalent of GAAP accounting for carbon accounting,” he said. “It will have to be, in some cases, industry specific.”

Agreeing on the specifics of measuring and disclosing this information—especially Scope 3 emissions, which come from a company’s value chain, both upstream and downstream—will enable companies and industries to get more granular in tracking them over time. A more detailed understanding of where emissions originate could eventually enable companies to make informed decisions based on the climate impacts of their business partners, Wyatt said.

But investors pushing for higher-quality data and greater transparency in the coming years doesn’t mean that companies can’t make progress in the meantime.

“The contention that we don’t have enough standardization is a red herring designed to slow climate action,” Francis said. “Standardization is here and we shouldn’t let the profusion of acronyms, which is a signal of professionalization in the space, be an excuse for inaction.”

And, ultimately even execs at these measurement-focused software companies warn against letting the data collection process distract from actually slashing emissions.

“I think there is definitely this danger that we’re just talking about the measuring piece and we don’t reduce,” Raphael Güller, co-founder of French carbon management platform Sweep, told us.

While the numbers are important, the final SEC rules around narrative disclosure and the explanations companies need to provide about their climate risks and mitigation plans, could be the most revealing piece of reporting, Wyatt said.

“All of that is arguably even more interesting and important than the baseline carbon reporting, because it’s where you take the information that the carbon reporting gives you and you funnel it through management’s analysis. It’s sort of like, the management’s discussion and analysis section of a 10-K is, in some ways, the most interesting part because it’s management telling you, ‘this is what’s important to us,’” she said.