Should the SEC Require Publicly-Traded Companies to Disclose Climate Change-Related Risks? (S. 2075)
Do you support or oppose this bill?
What is S. 2075?
(Updated January 8, 2021)
This bill — the Climate Risk Disclosure Act of 2019 — would direct the Securities and Exchange Commission (SEC) to require an issuer of securities to annually disclose information regarding climate change-related risks.
Specifically, every publicly-traded company would be required to provide information on:
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Its direct and indirect greenhouse gas emissions;
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The total amount of fossil-fuel related assets that it owns or manages;
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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 1.5 degrees Celsius goal; and
- Its risk management strategies related to the physical risks and transition risks posed by the climate crisis.
Additionally, this bill would direct the SEC to tailor these disclosure requirements to different industries and impose additional disclosure requirements on companies engaged in the commercial development of fossil fuels.
Currently, while the SEC has issued guidelines suggesting that companies consider climate change’s effects on their assets, it hasn’t mandated any specific disclosures.
Argument in favor
Climate change risk disclosures are one way to hold corporations accountable for their role in the climate crisis. They’re also an important tool to help investors understand their investments and how they could be affected by climate change. Requiring better disclosure of climate change risks could push investors and corporations to take more action to address climate change.
Argument opposed
Even without regulators’ intervention, many companies are already making their own climate change disclosures. The industry-led Task Force on Climate-related Financial Disclosures (TCFD) has released recommendations on this issue and is tracking companies’ adoption of its recommendations. Investors, such as BlackRock, are also encouraging greater disclosure. There’s no need for the SEC to get involved.
Impact
Securities issuers; the SEC; and climate change risk disclosures by securities issuers.
Cost of S. 2075
A CBO cost estimate is unavailable. However, as written, Sen. Warren’s office says this bill shouldn’t have a cost to taxpayers.
Additional Info
In-Depth: Sen. Elizabeth Warren (D-MA) reintroduced this bill from the 115th Congress to require public companies to disclose critical information about their exposure to climate-related risks:
"It's time to wake up and fight back against giant corporations that want to pollute our environment and ask taxpayers to clean up the mess. I'm reintroducing the Climate Risk Disclosure Act to give investors, and the American public, the power to hold corporations accountable for their role in the climate crisis."
In another statement, Sen. Warren argues that this bill will push investors to move their money out of fossil fuels:
“My plan will push more investors to move their money out of the fossil fuel industry, accelerating the transition to clean energy. It will also demonstrate to investors that — if nothing else — climate change represents a serious risk to their money and they need to demand global action to address it.”
In a one-pager describing this bill, Sen. Warren’s office contends that it will “help the market appropriately assess the risk of climate change, which will help push private actors and government actors to act more decisively to address climate change.” Additionally, Sen. Warren’s office contends that it will help promote financial stability without spending any taxpayer money.
In comments before the House version of this bill passed the House Financial Services on a 34-25 vote, its sponsor Rep. Sean Casten (D-IL) said:
“Climate change is a risk to the stability of the global financial system. This bill presents a market-based solution to understand the impact of a changing climate on companies and provide investors, lenders, and insurers with better information… We must act now to address climate change. We are running out of time… In just the past few decades rising temperatures have worsened extreme weather events; wildfire seasons are longer; in Illinois the painting season has been shortened from seven months to six months. Mosquitoes are expanding their territory, spreading tropical disease. Two feet of sea-level rise is already baked in.
When I asked on the Science, Space and Technology Committee what cities we are most concerned about the answer was the entire Eastern seaboard. What does that mean if you are a property manager investing in assets on Miami [B]each? What does that mean if you are a seed developer who has seeds that are not going to be able to germinate at the rising temperatures in my home state of Illinois? If you are an investor, you would like to know the answers to those questions. Many companies already make these disclosures, but more needs to be done. According to a 2017 KPMG study, half the world’s largest companies are acknowledging climate change as a financial risk… [O]ver 90 percent of the world’s largest companies are already reporting on their sustainability impacts, and smaller companies are following suit. There is much more that can be done. That is why the Climate Risk Disclosure Act is so important.”
In a 2013 op-ed co-authored with David Blood, former Vice President Al Gore — who has made climate change his signature issue since leaving public office — argued for incorporating carbon risk financial assessments. Blood and Gore advocated 1) identifying carbon asset risks across portfolios; 2) engaging corporate boards and executives on plans to mitigate and disclose carbon risks; 3) diversifying investments into opportunities positioned to succeed in a low-carbon economy; and 4) divesting fossil fuel assets. Although this bill doesn’t achieve all those aims, it addresses the first, which Blood and Gore wrote was the essential starting point:
“At a minimum, investors should determine the extent to which carbon risk is embedded in current and future investments. This can be achieved by, for example, considering the key drivers of a company’s current and future asset base in the context of carbon risks and developing tools that quantify risks for valuations. Note that passive, index tracking funds should also identify their exposure to carbon risks since they too are vulnerable to stranding as fossil fuel-dependent assets make up roughly 10%-30% of most major exchanges.”
California Public Employees' Retirement Pension (CalPERS) supports this bill. It argues that it's necessary "because it will support investors in understanding the sustainability of their investments and in the development of the type of sustainable economy through which pension funds such as CalPERS can generate the returns we need over the long term."
However, it’s also worth noting that even without regulatory intervention, many companies have already committed to greater climate change-related disclosures. At the end of 2017, more than 240 companies, with a combined market capitalization of over $6.3 trillion, had expressed support for the TCFD’s climate change disclosure recommendations. Additionally, Climate Action 100+, a global investor initiative focused on 161 large greenhouse gas emitters, had 289 investors from 29 countries, with a total of over $30 trillion in assets under management, as of July 2019. In April 2018, 16 large banking groups also released a methodology developed under the UN Environment Finance Initiative to help financial institutions be more transparent about their exposure to climate risks and opportunities.
In the current Congress, this legislation has 16 Democratic Senate cosponsors (including all Senators running for the 2020 Democratic presidential nomination) and has not received a committee vote. Its House companion, sponsored by Rep. Sean Casten (D-IL), passed the House Financial Services Committee by a 34-25 vote with the support of 24 Democratic House cosponsors.
Last Congress, this legislation had eight Democratic Senate cosponsors and didn’t receive a committee vote. There was no House companion in the 115th Congress.
This legislation is endorsed by former Vice President Al Gore and 33 environmental and scientific organizations, including 350.org, American Family Values, Anthropocene Alliance, As You Sow, Center for International Environmental Law, Ceres, Climate Hawks Vote, Dwight Hall Socially Responsible Investment Fund, Friends of the Earth, Gasp, Global Witness, Greenpeace USA, Institute for Agriculture and Trade Policy, League of Conservation Voters, Natural Investments LLC, Sierra Club, Sisters of St. Francis of Philadelphia, the Sustainability Group of Loring, Wolcott & Coolidge, Trinity Health, Union of Concerned Scientists, Vert Asset Management, and Mercy Investment Services.
This bill is likely to face strong Republican opposition. With Republicans holding the Senate, it’s unlikely to come up for a vote. Even if Democrats win a Senate majority in 2020, it’ll remain difficult for ambitious climate legislation to garner enough Republican senators’ support to meet the 60-vote minimum for passage in that chamber.
Of Note: In an August 2019 Special Report on Climate Change and Land by the UN Intergovernment Panel on Climate Change (IPCC) in Geneva, experts highlighted how rising global temperatures are increasing pressures on fertile soil and potentially jeopardizing the planet’s food security. Valérie Masson-Delmotte, Co-Chair of one of three Working Groups that contributed to the 1,200-page report, also noted that people are already suffering the effects of climate change, saying, “Today 500 million people live in areas that experience desertification. People living in already degraded or desertified areas are increasingly negatively affected by climate change.” Working Group Co-Chair Hans-Otto Pörtner stressed that there is “no possibility for anybody to say, ‘Oh, climate change is happening and we (will) just adapt to it.’ The capacity to adapt is limited.”
In a June 2019 report, Moody’s Analytics reported that climate change could create tens of trillions of dollars in damages to the world economy by 2100. Rising temperatures and shifting precipitation patterns will affect agricultural production and universally hurt worker health and productivity. The report also noted that sea-level rise will threaten coastal communities and island nations. Ultimately, the report concludes that there are five major takeaways from climate change:
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Physical costs of climate change will compound slowly over time, so it won’t cause recessions. The only acute effects will originate from heightened occurrence and severity of natural disasters.
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The most significant impacts of climate change won’t be felt until 2030 and beyond, and they won’t become especially pronounced until the second half of the century. Before that point, the tangible effects of climate change will mostly be felt in the form of increased incidence and severity of natural disasters.
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The heterogeneous effects of climate change create different incentives and disincentives for countries to adopt public policies to regulate greenhouse gas emissions. Northern European countries (which will see some benefits from climate change) have fewer incentives to adopt policies to mitigate greenhouse gas emissions in comparison to the emerging economist of Southeast Asia (which will see some of the most profound negative impacts of climate change).
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Climate change carries vast geopolitical risk. If it causes slower economic growth, it may cause massive international emigration from affected areas and put strain on certain countries that are receiving the immigrants.
- The effects of climate change will be far more dire in certain locations than across entire countries, particularly in terms of the effects of sea rise.
In an April 2016 report, Freddie Mac predicted that climate change will eventually destroy billions of dollars’ worth of property, producing “economic losses and social disruption . . . likely to be greater in total than those experienced in the housing crisis and Great Recession." Building off a climate risk assessment by the Risky Business Project, Freddie Mac estimated that $66-160 billion worth of real estate will be below sea level by 2050; and by the end of the century, that range will increase to $238-507 billion.
Energy experts estimate that the global community will have to dramatically reduce fossil fuel consumption over the next 30 years in order to reach the goals of the Paris Agreement. This would mean generating nearly 0% of electricity from coal and 8% from gas by 2050, while also using carbon dioxide removal.
Due to climate change, the past half-decade is likely to become the warmest five-year stretch in recorded history. On a global scale, even small temperature increases can have major impacts on climates and ecosystems: for example, for every 1ºC increase, air’s moisture carrying capacity increases approximately 7% — leading to an uptick in extreme rainfall events. Those events can in turn trigger landslides, increase soil erosion rates and damage crops — and that’s only one example of how climate change can cause chain reactions.
Two consecutive Worldwide Threat Assessments under two different Directors of National Intelligence — the first in 2016, issued by James Clapper in the Obama administration, and the second in 2017, issued by Dan Coats in the Trump administration — have called climate change a global security threat that could cause global political instability, adverse health conditions, humanitarian crises, political unrest, and more.
To understand existing corporate disclosures around climate change, the industry-led Task Force on Climate-related Financial Disclosures (TCFD) surveyed 2017 disclosures from over 1,700 firms from diverse sectors with broad geographical representation. It found that the majority of firms disclosed information aligned with at least one of its recommendations. However, it also found that while many companies describe climate-related risks and opportunities, few disclose climate change’s financial impact on themselves, and that disclosures vary widely across industries. The TCFD also found that disclosures were made in a variety of places, including sustainability reports, financial filings, and annual reports.
Additionally, many investors have taken a strong public stance in favor of disclosure. In his 2018 letter to CEOs, BlackRock CEO and Chairman Larry Fink urged them to disclose material financial risks related to climate change. Climate risk disclosure was also one of BlackRock’s engagement priorities in 2018.
However, writing in GreenBiz in 2018, Mahony Partners founder and managing partner Richard Mahony argued that the lip service paid to climate change disclosures hasn’t changed corporate reporting much, if at all:
“[D]isclosures about climate risk in corporate filings barely changed from past years. Climate risk continued to be described in vague, boilerplate language and mainly regarded as a regulatory risk… Companies ignored even the relatively simple TCFD recommendation around governance, which said a company should discuss the board’s oversight of climate-related risks and opportunities. That’s a pretty low bar. A governance discussion doesn’t require fancy math or scenario modeling. What’s more, the broad discussion about climate risk has focused on the wrong companies. Big oil and gas producers are almost always the ones in the crosshairs, but climate change is affecting companies in nearly every industry.”
Mahony alluded to the need for regulators, who have historically shown “little appetite” for mandating climate disclosure, to get involved to compel greater disclosures by companies. He noted that the prospect of stronger regulation in Europe has made companies in France, the U.K., and Germany farthest along in preparing to disclose risks in accordance with TCFD guidelines.
Media:
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Sponsoring Sen. Elizabeth Warren (D-MA) Press Release
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Sponsoring Sen. Elizabeth Warren (D-MA) One Pager
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House Sponsor Rep. Sean Casten (D-IL) Press Release
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Endorsing Organizations Letter
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The Hill
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CNBC
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Moody’s Analytics Report (Context)
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Freddie Mac Report (Context)
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Intergovernmental Panel on Climate Change (IPCC) Report (Context)
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Task Force on Climate-related Financial Disclosures (TCFD) Status Report (Context)
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EY Report (Context)
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GreenBiz (Context)
Summary by Lorelei Yang
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