Climate Risk Disclosure Act Is Good for Your Investments

July 25, 2019 | 9:00 am
James Palnisad
Nicole Pinko
Former Contributor

Last week the House Financial Services Committee passed H.R. 3623, the Climate Risk Disclosure Act of 2019, a bill that would require companies to annually disclose their climate change-related financial and business risks. Rep. Sean Casten (D-IL) introduced the legislation, with Rep. Cartwright (D-Penn). Sen. Warren (D-MA) has introduced a similar bill.

Union of Concerned Scientists (UCS) has actively supported the bill by providing expertise and organizing a letter of support signed by more than 50 investors and public interest organizations. This legislation is desperately needed – our economy is so interconnected, and the effects of climate change so far-reaching that no publicly-traded company is untouched by or immune to climate-related financial risks.

Climate Risks Are Financial Risks

Earlier this month, my colleagues and I attended a hearing on this bill at the House Subcommittee on Investor Protection, Entrepreneurship, and Capital Markets. Of the four witnesses, three: Tim Mohin of GRI; James Andrus of CalPERS; and Mindy Lubber of Ceres supported the legislation and clearly stated that climate risks are financial risks. CalPERS needs companies to better disclose these risks to meet its own climate-risk disclosure requirements, as mandated by the California Senate.

The breadth of climate impacts means that no business is immune from climate-related financial risks.

Does your business have physical operations or offices, and are they likely to experience heat/drought/sea level rise/flooding/extreme weather (if not please explain)?

Does your business rely on physical infrastructure for shipping in or out, and is that ever in places that experience extreme weather?

Do you hold your money in a bank that has fossil fuel investments or has its own climate-related risks?

Does your supply chain produce greenhouse gas emissions, and is your business prepared to account for those emissions in the event of federal or state emissions reduction legislation? Our economy is so integrated that any climate-related financial risks will have outsized effects on the rest of the market.

Improved disclosure will benefit both investors and companies

Companies may face any number of direct or indirect climate-related financial risks, and both companies and investors should be aware of them.

If the current administration’s trade war has taught us anything, it’s that companies need to have a firm understanding of their supply chains, their markets, and the risks that may affect demand and supply. Investors deserve to know that the company is actively monitoring how its climate-related financial risks will affect the bottom line and its contingency plans for mitigating those risks.

For companies that meet the sizable financial and governance requirements to be publicly listed on a stock market, enhanced disclosure is not an undue burden–and this bill provides a framework for companies to monitor a real and substantial financial threat (or a potential opportunity in the low-carbon market) and share that information with their shareholders.

Companies will emerge with more robust climate plans, and investors will (finally) have a mandated climate reporting framework that will allow them to evaluate and compare the climate risks in their portfolios.

The bill calls for the development of specialized metrics for the finance, insurance, transportation, electric power, mining, and fossil fuel industries.  These sectors are particularly key because they have the most substantial climate-related financial risks, either from their greenhouse gas footprints, reliance on fossil fuels in their supply chains, or from climate impacts.

Self-interested opposition

The bill’s opposition has spoken a lot about the mom and pop investors, but people who put their money in the market are rarely picking and choosing from among the Russell 3000 for the best stocks because that’s simply not how the markets work anymore.

The main street investor (like my mom and pop) won’t be confused or overwhelmed by this disclosure because the main street investor won’t be reading it – the average investor puts their money in an index fund that is managed by experts and designed to hedge risks. If your grandparents are poring over a company’s financial statement to assess risks to their returns, I’d guess that they’d vastly prefer a standardized and comparable disclosure of climate-related financial risks to the patchwork of data currently provided.

The opponents’ talking points parrot those of the Main Street Investors Coalition, a misleadingly-named group that specializes in advocating for the rollback of shareholder rights.  The coalition is housed by the National Association of Manufacturers (NAM), which has historically close ties to the fossil fuel industry, and was formed in the wake of unexpectedly successful shareholder resolutions in 2017 requesting better climate risk disclosure.

The link between the industries with the greatest climate risks and the groups vocally opposing this legislation should not be overlooked.

The current system is not working

The SEC requires companies to disclose material risks—and since 2010, has provided guidance for reporting on material climate-related financial risks. The problem with this guidance is that it allows individual companies to determine what is or is not material instead of providing a usable framework for consistent and comparable disclosures.

Because of this, what investors get from companies in their annual SEC disclosure (and in other reports) is often incomplete and is not comparable across companies, even within the same industry. The SEC even agreed that the current guidance doesn’t adequately capture climate risks up and down the supply chain.

UCS came to a similar conclusion in our 2018 Climate Accountability Scorecard, which examined eight major fossil fuel companies.  In our analysis, we found that the companies relied on vague, boilerplate language for climate disclosures and often used the exact same language year after year, despite significant changes in the regulatory and market landscapes.

In particular, only one of the eight companies we evaluated detailed how it plans to respond to the physical risks of climate change while six omitted climate change as a contributor to the risks posed by severe weather.  Only three of the eight companies specifically mentioned climate-related governance oversight in their board and committee descriptions.

Leading companies are already moving in the direction set out by the bill; 70% of S&P 500 companies responded to the CDP’s (formerly Carbon Disclosure Project) extensive survey in 2017. This legislation would create a mandatory framework so that the data is comparable and standardized (a basic market efficiency), has the approval of executive leadership and the company board of directors, and is submitted to the SEC so that it becomes public and is subject to SEC review for accuracy. We require the same standard of disclosure for other financial risks that may face companies, and if companies were applying the materiality standard fully themselves, much of this information would ALREADY be disclosed.

What’s next?

Now that this legislation has passed out of the Financial Services Committee, we are hopeful that it will soon come to a vote before the Full House of Representatives. It’s important for members of Congress to hear from their constituents, including real mom and pop investors like pension fund beneficiaries or those with retirement savings in the market, in support of this bill.  If that sounds like you, consider writing your representative and asking them to cosponsor the legislation.  If that doesn’t sound like you (student loans are rough), consider writing them anyway as someone who wants a more robust and secure financial market.

Even if you keep all your money buried in the yard or under the mattress, write your representative in support of the Climate Risk Disclosure Act because the effects of a climate-related financial crisis will still find you in a mountainside bunker.