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US SEC should mandate climate disclosure risks: report

11 February 2021 Amena Saiyid

The US Securities and Exchange Commission (SEC) needs to move past guidance and require that publicly traded companies disclose climate risks, according to a report released 11 February.

Jointly penned by the nonprofit Environmental Defense Fund and New York University School of Law's Institute for Policy Integrity, the report said the current quality of firms' climate risk disclosures is not at the same level as that for other forms of risks that publicly traded companies routinely disclose.

Rather, the report deemed the current level of disclosures as often incomplete and inadequate.

As a result, the report calls on the US government to improve and mandate its current disclosure regime because it will "help not only investors deciding how to allocate capital across corporations but also the corporations themselves."

The push for mandatory disclosure follows less than a month after President Joe Biden, in a climate blueprint, highlighted the need for such disclosures to avoid what he called "the most catastrophic effects of that crisis."

"The federal government must drive assessment, disclosure, and mitigation of climate pollution and climate-related risks in every sector of our economy, marshaling the creativity, courage, and capital necessary to make our nation resilient in the face of this threat," Biden's 27 January order said.

Biden has recommitted the US to the non-binding 2015 Paris Agreement goal of limiting the global rise in temperatures to 1.5 degrees Celsius or well below 2 degrees Celsius. He also has pledged to reduce the power sector's greenhouse gas emissions to net-zero levels by 2035 and across the economy by midcentury.

Climate risks

Companies face physical risks from the harmful effects of climate change that manifest themselves in the form of the direct economic costs of repairing facilities damaged by rising waters, hurricanes, and wildfires, and indirect impacts such as increased insurance premiums. They also face transitional risks such as changing clean energy technology, changes in climate policies, and related litigation, among others.

In 2020 alone, the National Oceanic and Atmospheric Administration estimated the US experienced 22 "billion-dollar weather events," or extreme weather events that caused more than $1 billion each in direct economic damage—totaling $95 billion.

The SEC, as the primary regulator of American securities markets, has acknowledged that climate risk qualifies as a material financial risk that has given rise to a number of internationally accepted voluntary disclosure standards, such as the ones developed by the Sustainability Accounting Standards Board (SASB) and the Task Force for Climate-Related Financial Disclosures (TCFD). But despite the SEC's guidance and the recommendations from the SASB and TCFD, most climate risk disclosures continue to use boiler plate language that investors find inadequate to make informed decisions, according to the report.

An improved mandated regime, according to the report, would push companies to engage in careful and systematic analyses of their exposures to climate risk, preventing them from ignoring worst-case scenarios or unfavorable information.

To that end, the report recommends the SEC not only develop institutional expertise in climate risk as the Bank of England has done, but also develop channels to solicit stakeholder input through advisory committees.

Evidence-based decisions needed

"SEC-directed research into climate risk would help the agency make informed, evidence-based decisions as it establishes new policies and rules," the report said, adding this knowledge would help the SEC prioritize which industries remain most urgently in need of improved climate risk disclosure, and how best to regulate and structure disclosures.

According to IHS Markit Senior Research Analyst Sara Giordano, the era of net-zero emissions targets has been a catalyzer for more investors' and companies' action on disclosure.

"Achieving an economy-wide net-zero emissions position in 30 years requires businesses and investors to significantly improve their understanding of climate-related risks to reorient their strategies and capital. Disclosure is therefore a fundamental piece of the climate agenda to drive emissions down in line with these new targets and to improve the economy's resilience toward a net-zero economy," Giordano wrote in a 12 November report.

Numerous major asset management companies have said that they are incorporating climate risk into their decisions, whether that is increasing investments in clean technology and related industries or pulling out of some types of fossil fuel-related investments.

The most recent major announcement of this type was made on 10 February by Canada-based Brookfield Asset Management, which said it is seeking to raise $7.5 billion for a Global Transition Fund that will be directed toward catalyzing decarbonization of companies and assets.

In a statement to shareholders and the public, posted on 10 February, the company said that the transition to net zero will require investment of over $100 trillion globally in the next three decades. "Investors will increasingly be expected to manage climate risks and realize the enormous opportunities from the transition, which will involve virtually every sector of the economy," Brookfield said.

Posted 11 February 2021 by Amena Saiyid, Senior Climate & Energy Research Analyst, IHS Markit

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