December 2, 2022

Opinion | Big Business’s Undisclosed Climate Crisis Plans

As the climate crisis intensifies, U.S. environmental policy has moved dangerously backward, with nearly 70 environmental rules reversed during this administration, and 30 more reversals in process. This intransigent, head-in-the-sand approach will not alter the reality of climate change, nor the risks and opportunities it presents the economy. The private sector understands this.

Many large businesses and their investors, recognizing the urgency of the threat, are already attempting to protect their assets and investments from climate risks. As some continue to publicly question the science, they are shifting their capital to prepare for a future low-carbon economy. They know that a significant percentage of the U.S. equity market, as much as 93 percent by one estimate, is already exposed to harms from climate change, with this year’s intensified fire and hurricane seasons offering a devastating preview of more to come.

Both investors and the broader public need clear information about how businesses are contributing to greenhouse gas emissions, and how they are managing — or not managing — climate risks internally.

Realistically, that can happen only through mandatory public disclosure. A recent report, “Managing Climate Risk in the U.S. Financial System,” by an advisory group to the Commodity Futures Trading Commission, warned that “a world wracked by frequent and devastating shocks from climate change cannot sustain the fundamental conditions supporting our financial system.”

The report emphasized that greater public disclosure of companies’ in-house risk calculations will be essential in helping governments (local and federal) as well as other businesses (large and small) measure and manage their climate risks.

Financial regulators around the globe, from New Zealand to the European Union, are beginning to require that this information be made public. As the report notes, “existing legislation already provides U.S. financial regulators with wide-ranging and flexible authorities that could be used to start addressing financial climate-related risk now,” however, “these authorities and tools are not being fully utilized.”

Indeed, some U.S. regulators have even blocked progress. That needs to change.

A core purpose of the Securities and Exchange Commission, where I serve, is to develop and enforce disclosure requirements for public companies. rooted in the interests of investors and the public. Outdated thinking is stopping us from reducing climate risk through strengthening disclosure.

One prominent outdated notion is that investments made on the basis of environmental, social and governance risks — known in the industry as E.S.G. — are merely about one’s policy preferences or moral choices. That might have been closer to reality over a decade ago, but as E.S.G. investing has grown and matured, so too has an understanding of its value.

Today, lenders, credit rating agencies, analysts, stock exchanges and asset managers representing trillions in investments use E.S.G. as a significant driver in capital allocation, pricing and value assessments. A major study recently found that a large number of powerful institutional investors rank “climate risk disclosures” as being just as important in their decision-making processes as traditional financial statements and other metrics for an investment’s performance — like return on equity or earnings volatility.

Researchers at the Bank of International Settlements have called climate change “a colossal and potentially irreversible risk of staggering complexity.” It is a systemic risks that will threaten global financial stability and spare no corner of the earth: Health, food security and water supplies across the globe will be disrupted.

In the United States, we may experience the sort of climate-related migration that has begun elsewhere as Americans flee pockets of searing heat, seasonal fires, rising sea levels and flooding. Some of the worst-hit regions — the coasts, the West and the South — could experience damage totaling more than one-third of their economy, forcing the entire national economy to contract.

Dealing with and adapting to the coming calamities means we must price climate risk accurately and drive investment toward an orderly, sustainable transition to green portfolios — rather than panicked scrambles and stock sell-offs as we see more and more climate disasters.

The International Energy Agency estimates that globally it could take $3.5 trillion in energy sector investments alone every year through 2050 to reorient toward a climate-neutral economy. This pivot is not an ideological preference. It is an economic imperative. And it can effectively start only with accurate information.

There is a misconception that securities laws already operate to produce enough climate risk information through existing broad requirements to disclose important or “material” information. If not, the argument goes, the S.E.C. will come after them.

As a former S.E.C. enforcement lawyer who spent over a decade spotting failed and misleading disclosures, I can attest that enforcement of broad-based materiality requirements does not work with this kind of near-magical efficiency.

That’s why securities laws sometimes require very specific data and metrics on certain important matters like executive compensation. But, so far, not for climate risk. There are no specific requirements, and without that clarity how can companies be sure what is expected of them? As of now, there is little for us to enforce.

The voluntary disclosure that companies have increasingly provided in recent years is still largely regarded as insufficient. It’s not standardized, it’s not consistent, it’s not comparable, and it’s not reliable. Voluntary disclosure is not getting the job done. And without better disclosure of climate risks, it’s not just investors who stand to lose, but the entire economy.

We face an enormous task with a tight time frame and the highest of stakes — the livability of the planet. The S.E.C. can act now.

We can bring companies, investors and innovators to the table, and build on the work of organizations such as the Task Force on Climate-Related Financial Disclosures to identify which specific climate risks and metrics should be disclosed and how.

That’s the only way to get investors and the broader public the tools they need to protect their investments, instill corporate accountability and create a sustainable economy.

Allison Herren Lee is a member of the Securities and Exchange Commission. (The views expressed are her own and not those of other commissioners or S.E.C. staff.)

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