A Changing Climate Means A Changing Society. The Island Press Urban Resilience Project, Supported By The Kresge Foundation And The JPB Foundation, Is Committed To A Greener, Fairer Future. A Version Of This Article Was Originally Published August 29, 2019 in The Hill.
On Sept. 4, 10 Democratic presidential hopefuls took the stage at a CNN “town hall” on the climate crisis. Four of those candidates recently sponsored the Senate’s Climate Risk Disclosure Act of 2019, which requires every public company to disclose business risks from climate change to the Securities and Exchange Commission (SEC). This is a laudable effort: investors (and everyone else) can’t navigate the climate crisis if they don’t understand what’s at stake.
However, it’s not enough. SEC regulations that require disclosure of climate risks are already on the books; what’s lacking is the will to enforce them. While the act improves the data reported, it has no provisions for enforcement. That’s also the problem with the existing regulations: The SEC has done nothing to enforce them.
It is no secret that the climate crisis threatens business as usual. Back in 2008, the insurance industry identified climate change as the No. 1 risk facing the industry. And a hotter, wilder climate is likely to devalue many assets — including municipal bonds.
So, in 2010 the SEC issued interpretive guidance to reinforce its existing risk disclosure requirements. The guidance laid out specific areas to consider, including the impacts on businesses from weather-related events that can disrupt manufacturing and distribution processes; future climate change regulations that might impact coal/energy production; and international treaty obligations.
This guidance served notice that industry needs to come clean about climate risks. But according to Ceres, a nonprofit that oversees climate disclosures to the SEC, the notice fell on deaf ears, noting "nearly half of the 600 largest U.S. companies that we assessed still do not provide decision-useful disclosures on climate-related risks. Those that do often provide disclosures that are mere boilerplate or too brief, and effectively meaningless.”
Part of the problem is that climate disclosures rely on businesses to assess their own risks. In 2018, the Government Accounting Office (GAO) conducted an audit of the SEC’s efforts to clarify climate change disclosures. The audit found that the SEC staff evaluating disclosures relied solely on the information provided by the companies and did not have the authority to obtain additional information. But businesses (and SEC staff) typically lack the scientific expertise to assess climate risks. And businesses have a powerful reason not to try: an honest accounting of risk might scare off investors.
There’s a better way to do this. The Environmental Protection Agency (EPA) should support the SEC’s efforts relating to climate risk disclosure. The EPA has invaluable data on climate change and other environmental risks, which — together with the SEC’s understanding of business realities — could provide investors with a clear-eyed assessment of opportunities and dangers.
Enforcement is key. But, given the SEC's lack of internal expertise and its inability to request information from industry, it is not surprising that the SEC has filed no enforcement actions related to climate change disclosures. Instead, the SEC regulations are being virtually ignored by the SEC and by industry.
To really make a difference, the proposed Climate Risk Disclosure Act needs to include an enforcement regimen modeled after the highly successful Clean Air Act. That regimen would allow SEC staff, with EPA assistance, to request information from companies to establish compliance with SEC disclosure requirements. That way, the information request cannot get buried because of a lack of political will.
The presidential candidates can strengthen the act to make it clear that the SEC is responsible for implementing an enforcement program. Also, there must be technical support provided to SEC analysts (along with proper training) so that the SEC can understand what needs to be submitted.
The SEC is charged with making sure that investors have the information they need to understand the climate-related risks associated with their investments. This responsibility hinges on companies measuring, reporting and ultimately managing their material risks.
Armed with accurate information about climate risks, investors can protect their assets — and the larger economy — from staggering losses. The four Democratic senators running for president understand this, and the Climate Risk Disclosure Act they sponsored is a good start. Now they must strengthen the act so that risk disclosures are meaningful – and enforceable.