This article is part of the Future Agenda, a series from Future Tense in which experts suggest specific, forward-looking actions the new Biden administration should implement.
President-elect Joe Biden’s climate plan proposes a number of smart policies to confront climate change and promote clean energy, including something that may seem small on first glance: requiring publicly traded companies, for the first time ever, to rigorously disclose the financial risks they face due to climate change. This single change would durably link financial stability and protective climate action.
Mandating that companies disclose climate risks is an immediately implementable policy with far-reaching benefits. A wide and diverse group, from Sen. Elizabeth Warren to the Federal Reserve, is already calling for such action. And crucially, the U.S. Securities and Exchange Commission under a Biden administration can make this happen under existing law.
Our financial system has always required publicly traded companies to disclose risks to their business. The long-standing approach makes intuitive sense: Because millions of ordinary Americans invest in these companies either directly via the stock market or through asset managers, it’s important that they be transparent about their business prospects. Publicly traded companies do this by issuing periodic financial reports, which reveal the different ways these companies are planning for the future. Asset managers, and the trillions of dollars they invest, rely upon those reports to help determine the soundness of an investment. For this reason, when public companies fail to fully disclose foreseeable risks to their business, they can be exposed to multiple fronts of liability, shareholder lawsuits and SEC penalties among them.
Yet when it comes to the significant and growing risks of climate change—from more severe hurricanes to prolonged heat waves to increased flood risks—companies typically fail to disclose risk beyond the occasional uninformative and generalized statement. For instance, in its 2019 SEC filing, Exxon Mobil stated that climate change “could make our products more expensive, less competitive, lengthen project implementation times, and reduce demand for hydrocarbons.” The generality of this type of disclosure is of little use to investors, regulators, and the American public.
Climate change, and the extreme and changed weather it causes, is not a risk for the far future. The consequences have arrived, and even incomplete estimates have concluded that corporations face monumental economic harm—with dollar estimates measured by the trillion. What’s more, attribution science can now show with incredible granularity and detail how climate change amplifies risks to specific corporate assets and operations, sometimes down to the individual mile. This degree of granularity means that companies are increasingly able to foresee how climate change will affect their individual facilities.
The upshot of these advances is that climate change–amplified extreme weather events are no longer unknowable acts of God, and their potential to damage company assets is increasingly measurable. Mandatory climate risk disclosure is a way to ensure that investors and the public can understand how climate change affects the financial health of these companies and react accordingly.
Mandating climate risk disclosure means moving away from our current, voluntary approach. As SEC Commissioner Allison Herren Lee recently wrote, “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.”
The goal is to mandate climate risk disclosure that results in specific, comparable, and decision-useful information. That would provide investors, regulators, and the public with robust insight into the specific climate risks a particular company must contend with. Reaching that goal will mean replacing generalizations with specific data—for example, revealing how climate change–amplified flooding affects the value of a business’s coastal facilities.
Mandating that a company disclose how climate change affects its financial outlook means treating it like any other risk in the financial sector. That means asset managers will consider climate change alongside other forms of risk when they determine the soundness of an investment. This, in turn, will help align prudent financial decision-making with sustainability and protective climate action.
No new legislation is necessary to move climate risk disclosure forward. The Securities and Exchange Commission has the authority and responsibility to act under existing law, and Biden will soon have the power to designate a commission chair who can protect investors from these material and increasingly systemic risks. Support across industries, public and private investors, and other interests will also be instrumental. Fortunately, there’s already a growing consensus.
Calls to extend mandatory disclosure to encompass the risks of climate change are intensifying from a far-reaching set of interests. The Federal Reserve recently made clear that banks should “have systems in place that appropriately identify, measure, control, and monitor all of their material risks, which for many banks are likely to extend to climate risks.” Larry Fink, CEO of the world’s largest asset manager, BlackRock, has called for more robust disclosure and has made clear that “climate risk is investment risk.” Elizabeth Warren and Rep. Sean Casten of Illinois have made similar arguments from Capitol Hill. And in a landmark report from the Commodity Futures Trading Commission, co-authors from large banking institutions to environmental nonprofits unanimously recommended climate risk disclosure. Efforts to mandate climate risk disclosure are also advancing in the European Union, and both the U.K. and New Zealand have committed to mandatory regimes.
Confronting the climate crisis will require fundamentally redirecting the flow of capital away from risky, carbon-intensive investment and toward safer sustainable options. Doing so requires arming the financial community with the information necessary to make sound investment decisions. This is what disclosure is designed to accomplish. The SEC should move swiftly under existing law to require publicly traded companies to disclose the financial risks they face due to climate change.