By Gabriel Malek, Project Manager for Investor Influence, Environmental Defense Fund
When the U.S. Securities and Exchange Commission (SEC) unveiled its proposal on climate-related disclosures, it kicked off a 60-day window for public comment on the draft rule. Commissioners want to hear from stakeholders – particularly the investors they are charged with serving – on how the proposal would meet their need for information that drives business decisions.
As many of the world’s largest asset managers understand, climate risk is financial risk. One recent analysis finds that 215 of the world’s largest companies face nearly $1 trillion in climate-related risk. In the last two years alone, the U.S. experienced more than 40 climate and weather disasters that topped $1 billion per event in damages. Researchers estimate that climate-related transition risks could total 1.6% of global GDP by 2030.
Despite these clear hazards and investors’ increasing focus on climate, voluntary corporate climate disclosure remains vague and inconsistent. The Task Force on Climate-Related Financial Disclosures (TCFD) found that only 27% of companies disclose their climate risk mitigation strategies, while the Sustainability Accounting Standards Board (SASB) found that only 7% of companies include SASB-aligned disclosure in their annual reports. The vast majority of investors – including 93% of institutional investors – believe that markets have not yet fully incorporated climate-related risks.
The SEC’s proposed rule would address this gap through comparable, specific, and decision-useful disclosures, drawing on the widely used TCFD framework. The public comment period on the proposal closes on May 20, and the agency will review each comment it receives. Positive input from stakeholders can play a key role in helping the SEC move forward with a robust final rule. Here are five reasons to weigh in.
1 – Improve asset pricing
Hidden risks and opportunities can lead investors to misprice assets – overvaluing companies with unmitigated physical exposures or undervaluing those poised to deliver strong returns through a net zero carbon transition. Studies from the International Monetary Fund have shown that equity markets do not accurately reflect the physical risk of key climate change scenarios, a mispricing that could undermine financial returns.
Wendy Cromwell, the Head of Sustainable Investing at Wellington Management, recently described how the lack of consistent climate disclosures forces analysts to rely on third-party data brokers and sector averages – information that often falls short of companies’ own operational insight – to inform asset pricing. The SEC’s proposed rule would improve the quality and availability of corporate climate risk information, incorporating line-item climate disclosures in financial filings.
2 – Protect against systemic risk
Climate change poses systemic risks to the U.S. financial system that even the most diversified institutional investors cannot fully avoid. With improved climate risk disclosure, investors can better assess these risks and manage them through shareholder engagement and asset allocation.
John Hoeppner, the head of U.S. Stewardship and Sustainable Investing for LGIM America, has written about the importance of investor engagement on oil and gas methane regulation to drive emissions reductions. If finalized, the SEC proposal would facilitate direct engagement and help investors combat portfolio risks associated with their oil and gas holdings.
3 – Streamline data collection and analysis
Finding and comparing climate data is challenging for investors today. Voluntary, non-standardized reporting requires data analysts to comb through corporate sustainability and TCFD reports, news articles, and government filings to find tidbits of useful climate information. They are still often left with gaps.
Fitzann Reid, Deputy General Counsel with Engine No. 1, has described the “painful process” of combing through companies’ emissions goals and accounting for wide ranges in what data is reported, how companies present their plans, and year-to-year changes within company reports. The SEC proposal, she said, would allow investors to be more efficient in collecting data and filling in gaps.
4 – Align with global standards
In recent years, more than 30 countries with over $23.3 trillion in combined GDP have taken steps to require corporate climate risk disclosure. Through shared alignment with the TCFD, the SEC proposal would help investors gain a corresponding level of insight and support competitiveness in global markets by harmonizing domestic disclosures with those of other countries.
As Gary Kabureck, Senior Advisor to the Value Reporting Foundation, has noted, fragmented disclosure between the U.S. and international standards setters would be “the most sub-optimal outcome,” forcing companies to report similar information in multiple, disparate formats. The SEC proposal establishes a path for the efficient collection of directly comparable climate-related data.
5 – Avoid financial shocks
Financial experts warn that asset mispricing poses a significant threat to the stability of the U.S. financial system. Strengthening climate risk disclosure would allow investors to steadily incorporate new information into investment decisions, avoiding a sudden repricing that could otherwise disrupt financial markets.
In its 2021 “Report on Climate-Related Financial Risk,” the U.S. Financial Stability Oversight Council stated that “the increasing economic effects of climate change imply that climate-related financial risks are an emerging threat to the financial stability of the United States.” Improving climate risk disclosure is a crucial first step to avoiding this disruption.
As the SEC reviews comments on the way to finalizing a climate disclosure rule, the most useful inputs will clearly identify strengths or weaknesses of this proposal, explain the rationale for those views, and include supporting data.
The impacts of climate change are growing, and forward-looking companies are increasingly responding with innovation and risk mitigation. A strong climate disclosure framework will enable markets to accurately reflect those business decisions, and protect the health and stability of the financial system.