Should Companies Be Required to Disclose Climate-Related Risks?

• A new bill would require financial, insurance, and fossil fuel companies to disclose climate-related risks in their annual Securities and Exchange Commission (SEC) reporting.
• The Climate Risk Disclosure Act would require companies to report the physical risks that climate impacts, such as sea level rise, pose to their supply chains, operations and property.
• The current flooding of Duke Energy’s toxic coal ash ponds as a result of Hurricane Florence would be among the sorts of risk this bill would cover.

Background

The SEC already has some climate-risk reporting requirements on the books. Companies must discuss any “material” effects on their operations that arise from:

• The direct effects of existing or pending legislation and regulations related to climate change;
• The indirect effects of these laws and regulations (including “reputational risk”—the risk that negative public perception of a company’s publicly reported greenhouse gas emissions might hurt its business).
• The effects of physical changes caused by climate change (such as more severe weather events, water availability, and changing patterns of farmland fertility).

A 2014 report – published five years after the SEC’s original requirements came into force – took a dim view of the progress that both the SEC and reporting companies had made in honoring the spirit of the reporting requirements. The report found that:

• The SEC was not prioritizing the financial risks and opportunities of climate change as an important disclosure issue.
• The SEC’s enforcement of the rule started out strong but declined precipitously.
• Most S&P 500 climate disclosures were very brief, provided little discussion of material issues, and didn’t quantify impacts or risks.
• A large number of companies didn't say anything about climate change in their SEC reporting.

Two former Secretaries of the Treasury — Robert Rubin and Henry Paulson — agreed, and called for the SEC to be more aggressive in enforcing its climate change risk disclosure requirement. They and other investors called for greater SEC scrutiny of climate-related disclosures, particularly from energy companies.

At the same time, a two-year investigation by the New York attorney general revealed that coal company Peabody Energy knew coal demand would likely slump and prices fall, but it withheld this information from investors. In a November 2015 settlement, Peabody agreed to expand its climate risk discussion in its SEC filings, but according to the attorney general should have been making these disclosures all along, given their materiality. Peabody subsequently filed for bankruptcy.

Meanwhile, Exxon Mobil has been subject to investigation and lawsuits over allegations that the company repeatedly lied to its shareholders about its climate change risks over the last 40 years, in contravention of SEC rules.

The SEC has been largely silent on this matter. Advocates’ hopes for a renewed push on climate disclosure were stoked in January 2018, when President Donald Trump picked Jay Clayton to be chairman of the SEC. Clayton is a legal expert who played a key role at his law firm in getting clients, which included Exxon Mobil, to follow rules for full disclosure of climate-change impact.

Current bill

The Climate Risk Disclosure Act directs the SEC, in consultation with climate experts at other federal agencies, to issue rules within one year that require every public company to disclose:

• Its direct and indirect greenhouse gas emissions;
• The total amount of fossil-fuel related assets that it owns or manages;
• How its valuation would be affected if climate change continues at its current pace or if policymakers successfully restrict greenhouse gas emissions to meet the Paris accord goal;
• Its risk management strategies related to the physical risks and transition risks posed by climate change.

Mainstream investors have increasingly requested such disclosure, including from Exxon Mobil, Occidental Petroleum, and Kinder Morgan.

More than 46 percent of Duke Energy shareholders asked the company last year to perform the sort of risk analysis and disclosure that this bill would require. Had it done so, it would likely have alerted investors to the risk that its disposal ponds for toxic coal ash could flood in the event of climate-induced extreme weather events, as is happening now in the wake of Hurricane Florence.

Opponents of this type of legislation generally argue that climate-related risks are too difficult for individual companies to predict accurately, and that compliance would impose an excessive financial burden without providing corresponding value to shareholders.

What do you think?

Should publicly-traded companies be required to disclose climate-related risk? Why or why not? Hit Take Action to tell your reps what you think, then share your thoughts below.

—Sara E. Murphy

(Photo Credit: iStock.com / ferrantraite)