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The US Securities and Exchange Commission (SEC) needs to move
past guidance and require that publicly traded companies disclose
climate risks, according to a report released 11 February.
Jointly penned by the nonprofit Environmental Defense Fund and
New York University School of Law's Institute for Policy Integrity,
the report said the current quality
of firms' climate risk disclosures is not at the same level as that
for other forms of risks that publicly traded companies routinely
disclose.
Rather, the report deemed the current level of disclosures as
often incomplete and inadequate.
As a result, the report calls on the US government to improve
and mandate its current disclosure regime because it will "help not
only investors deciding how to allocate capital across corporations
but also the corporations themselves."
The push for mandatory disclosure follows less than a month
after President Joe Biden, in a climate blueprint, highlighted the
need for such disclosures to avoid what he called "the most
catastrophic effects of that crisis."
"The federal government must drive assessment, disclosure, and
mitigation of climate pollution and climate-related risks in every
sector of our economy, marshaling the creativity, courage, and
capital necessary to make our nation resilient in the face of this
threat," Biden's 27 January order said.
Biden has recommitted the US to the non-binding 2015 Paris
Agreement goal of limiting the global rise in temperatures to 1.5
degrees Celsius or well below 2 degrees Celsius. He also has
pledged to reduce the power sector's greenhouse gas emissions to
net-zero levels by 2035 and across the economy by midcentury.
Climate risks
Companies face physical risks from the harmful effects of
climate change that manifest themselves in the form of the direct
economic costs of repairing facilities damaged by rising waters,
hurricanes, and wildfires, and indirect impacts such as increased
insurance premiums. They also face transitional risks such as
changing clean energy technology, changes in climate policies, and
related litigation, among others.
In 2020 alone, the National Oceanic and Atmospheric
Administration estimated the US experienced 22 "billion-dollar
weather events," or extreme weather events that caused more than $1
billion each in direct economic damage—totaling $95
billion.
The SEC, as the primary regulator of American securities
markets, has acknowledged that climate risk qualifies as a material
financial risk that has given rise to a number of internationally
accepted voluntary disclosure standards, such as the ones developed
by the Sustainability Accounting Standards Board (SASB) and the
Task Force for Climate-Related Financial Disclosures (TCFD). But
despite the SEC's guidance and the recommendations from the SASB
and TCFD, most climate risk disclosures continue to use boiler
plate language that investors find inadequate to make informed
decisions, according to the report.
An improved mandated regime, according to the report, would push
companies to engage in careful and systematic analyses of their
exposures to climate risk, preventing them from ignoring worst-case
scenarios or unfavorable information.
To that end, the report recommends the SEC not only develop
institutional expertise in climate risk as the Bank of England has
done, but also develop channels to solicit stakeholder input
through advisory committees.
Evidence-based decisions needed
"SEC-directed research into climate risk would help the agency
make informed, evidence-based decisions as it establishes new
policies and rules," the report said, adding this knowledge would
help the SEC prioritize which industries remain most urgently in
need of improved climate risk disclosure, and how best to regulate
and structure disclosures.
According to IHS Markit Senior Research Analyst Sara Giordano,
the era of net-zero emissions targets has been a catalyzer for more
investors' and companies' action on disclosure.
"Achieving an economy-wide net-zero emissions position in 30
years requires businesses and investors to significantly improve
their understanding of climate-related risks to reorient their
strategies and capital. Disclosure is therefore a fundamental piece
of the climate agenda to drive emissions down in line with these
new targets and to improve the economy's resilience toward a
net-zero economy," Giordano wrote in a 12 November report.
Numerous major asset management companies have said that they
are incorporating climate risk into their decisions, whether that
is increasing investments in clean technology and related
industries or pulling out of some types of fossil fuel-related
investments.
The most recent major announcement of this type was made on 10
February by Canada-based Brookfield Asset Management, which said it
is seeking to raise $7.5 billion for a Global Transition Fund that
will be directed toward catalyzing decarbonization of companies and
assets.
In a statement to shareholders and
the public, posted on 10 February, the company said that the
transition to net zero will require investment of over $100
trillion globally in the next three decades. "Investors will
increasingly be expected to manage climate risks and realize the
enormous opportunities from the transition, which will involve
virtually every sector of the economy," Brookfield said.
Posted 11 February 2021 by Amena Saiyid, Senior Climate and Energy Research Analyst
