CERAWeek: Acting SEC chair seeks an international baseline for measuring climate risk

The acting head of the US Securities and Exchange Commission (SEC) is on board with working with international partners to create a set of principles to measure risks stemming from climate change impacts, such as rising sea levels, extreme changes in weather, and more frequent and intense wildfires.

"I think cooperation is key in working towards a common set of principles that can serve as a baseline" that can then be tailored by individual jurisdictions to suit their needs, Acting SEC Chairwoman Allison Herren Lee said during a 1 March discussion at CERAWeek by IHS Markit.

The discussion, moderated by IHS Markit Chief Energy Strategist Atul Arya, was centered around the need for metrics to assess investment risks targeting environmental, sustainability and governance, or ESG, risks as well as those related to climate change.

The SEC for the first time in 2010 acknowledged that climate change impacts do result in a material risk that companies, but its recognition has never translated into the quality of disclosures that investors such as BlackRock and institutional investors are beginning to seek. Less than a week ago, Lee ordered the SEC to begin a review of climate disclosure reports that companies had filed to date.

At CERAWeek, Lee acknowledged that disclosures that companies have made to date have been "inadequate" and insufficient for businesses that are looking to invest in a transition to a low-carbon future.

In crafting climate risk principles, Lee said, the SEC should work cooperatively with its partners at home and abroad. More importantly, she said, the SEC should not just involve investors, but also companies that are issuing securities for critical investments in clean energy technologies that will help them transition to a low-carbon future.

To that end, Lee said, "the energy industry is particularly well-positioned to lead on this issue."

She said the SEC has a key role to play as a regulator in bringing all key constituencies, which include investors and issuers together with financial institution as well as companies involved in rating credit, index providers and gathering data on climate risk.

"The question is not whether there should be regulatory involvement: The question is what's the right approach for regulatory involvement," Lee said. "We know the goals, and the goals are clear."

The goal is to reach consensus on a basic principles and use those to build metrics that are tailored to each jursidiction's needs.

"Analysts create metrics connected to the E, the S, and G, and businesses are competing for capital based on those metrics. We need to capitalize on that momentum and take a holistic look at those issues and not see mispricing of assets and misallocation of capital. We need to be mindful of those making those decisions based on those metrics," Lee added.

Lee acknowledged the importance and utility of voluntary climate risk reporting frameworks, such as the one developed by the Task Force for Climate-Related Financial Disclosures (TCFD), but also their shortcomings.

If there is no consensus on what should be disclosed, then how are investors to know what is being reported is reliable, she said. "I don't think it is realistically achieving its goal."

In a panel discussion following Lee's remarks, Arya questioned Lydie Hudson, chief executive officer for Credit Suisse's Sustainability, Research and Investment Solutions (SRI), about what ESG metrics have worked best for their bank.

Hudson said Credit Suisse not only considers the industry-adopted TCFD framework among others, but also has developed its own energy transition framework to guide companies that come in search of investment guidance.

Also participating in this discussion was Giulia Chierchia, executive vice president for strategy and sustainability for oil major BP P.L.C., who agreed with Lee on a need for simple, standardized metrics that each sector can then tailor to suit their own needs.

Posted 01 March 2021 by Amena Saiyid, Senior Climate & Energy Research Analyst, IHS Markit