Investors, companies demand consistent climate risk data
Investors don’t trade on ideologies. They trade on hard facts, and the fact is that climate change poses significant risks and opportunities to many companies today.
For years, investors have argued that climate risks are material to many companies and asked the Securities and Exchange Commission to offer guidance to improve climate disclosure. In 2010, the SEC agreed, issuing guidance pointing to evidence that climate change can pose material financial risks and opportunities in many industries. That guidance led to some improvements in disclosure, but as recent investor comments to the SEC show, reporting is still poor.
At the March Senate confirmation hearing of incoming SEC Chair Jay Clayton, Sen. Jack Reed (D-RI) noted that one of the world’s largest asset managers, BlackRock, expects (PDF) all corporate board members of companies "significantly exposed to climate risk" to be fluent in how climate risk "affects the business and management’s approach to adapting and mitigating the risk."
In response to Reed’s question about whether climate disclosures should be required, Clayton said, "Public companies should be very mindful of [the 2010 SEC guidance] as they’re crafting their disclosure."
Clayton could mean that the 2010 SEC guidance is sufficient by itself or that he would like to strengthen the guidance.
Let’s hope it’s the latter. That’s certainly what conscientious investors want.
Investors demand improved climate risk disclosure
Some 73 percent of institutional investors say they take sustainability issues such as climate change into account in their investment analysis and decisions, according to a 2015 CFA Institute survey (PDF).
And investors want stronger SEC disclosure guidance so they can compare environmental, social and governance (ESG) issues systematically across companies. You don’t need to look further for proof than the strong response last year to the SEC’s request for comments (PDF) on improving its disclosure system.
Two-thirds of letters (PDF) to the SEC addressed sustainability and 80 percent of those letters supported expanded ESG disclosure requirements. Just 10 percent opposed action. Investors of all types — public pension funds, labor funds, religious investors, responsible investors and others — sent a "clear message" to the SEC that they need better information on all sustainability topics.
What’s new is that for the first time, two of the world’s largest asset management firms are publicly supporting improved disclosure.
State Street Global Advisors requested (PDF) "that the SEC consider requiring listed companies to enhance their ESG-related disclosures." The company asked the commission to consider identifying appropriate key performance indicators (KPI) by industry and sub-sector, an approach that is gaining growing support, and introducing standardized reporting of KPIs on an annual basis.
BlackRock identified climate risk disclosure as an engagement priority for 2017-18. The company will engage companies "most exposed to climate risk" to understand their views on climate risk disclosure and to encourage them to improve their reporting.
BlackRock also mentioned the need for new disclosure rules: "Given climate risk is an universal issue, we believe disclosure standards should be developed that are applicable to listed companies across each market and, ideally, that are globally consistent."
The message from investors is loud and unmistakable. They expect climate risk issues to be addressed in disclosures with as much seriousness and clarity as companies address any other financial issue.
Mandatory disclosure is needed
Corporations, accountants and ratings agencies increasingly recognize that investors are right.
Thirty-two of them are represented on the Task Force on Climate-related Financial Disclosures (TCFD), the first global body of corporations and investors to recommend consistent, comparable climate risk disclosure in financial filings worldwide. Formed at the request of G20 nations, this task force represents a high-level, global recognition of the need for better climate disclosure.
The TCFD released its draft report in December. It included 11 key recommendations. What’s most important is that they go well beyond the SEC’s 2010 guidance by recognizing the need for companies to report on critical issues such as:
- The board’s oversight of climate-related risks and opportunities;
- The metrics used by the organization to assess climate-related risks and opportunities in line with its strategy and risk management process; and
- The targets used to manage climate risks and opportunities and performance against targets.
Strong recommendations such as these show that, without a doubt, the TCFD has recognized that companies need to step up their climate risk management and disclosure to keep up with and even lead the transformations of our energy systems that are needed to avoid dangerous climate change.
Comments from task force members capture what needs to happen next for a sea change in the quality of disclosure.
First, disclosure needs to become mandatory. Mark Wilson, CEO of the insurer Aviva, said, "We should give the disclosure real bite by making these recommendations mandatory, not voluntary. Only then will climate risk become integral to corporate governance and how we all do business."
And, to minimize claims that companies will be disadvantaged by new climate reporting requirements, disclosure rules should be improved and aligned globally as much as practical. Air Liquide said that "disclosure should be implemented across the competitive landscape worldwide to be efficient."
As the TCFD found, we’re seeing more climate risk disclosures, but they aren’t standardized, which makes it difficult for investors, lenders, insurance underwriters and others to use the information.
Disclosure has to evolve in step with the market. And the actions of investors and companies make it all too clear that climate change is affecting the financial condition and operating performance of companies and industries.
Financial regulators such as the SEC should take immediate action to improve climate risk disclosure, issuing rules aligned with the TCFD’s report and working to align their efforts with those of regulators in other countries.
Globally, the TCFD’s report provides a clear roadmap for regulators in G20 nations to begin drafting new rules. In the United States, the TCFD’s report plus investor responses to last year’s SEC Concept Release provide an even clearer roadmap.
Efficient, effective markets run on transparency and information. And investors need credible, comparable, consistent climate risk disclosure now.