The U.S. Struggle Over Climate-Change Disclosure Is Coming To A (Hopefully Successful) Head

On February 26 the Subcommittee on Investor Protection, Entrepreneurship and Capital Markets of the House Financial Services Committee held a hearing that included discussion of the “Climate Risk Disclosure Act of 2021” introduced by Rep. Sean Casten (D-Ill). This bill calls for the Securities and Exchange Commission to amend Section 13 of the Securities Exchange Act of 1934 to require companies to disclose on the “(i) physical risks posed to the covered issuer by climate change; and ‘‘(ii) transition risks posed to the covered issuer by climate change.” It was passed along partisan lines by the full Financial Services Committee in 2019. Sen. Elizabeth Warren (D-Mass.) introduced a similar bill in the Senate and on August 12, 2020 sent a letter to then SEC Chairman Jay Clayton urging him “to implement standard climate risk disclosures so that investors and the public can accurately assess and address climate-related environmental and financial threats.”

Not surprisingly, in an administration where former President Trump instructed the Environmental Protection Agency to remove the words “climate change” from its website, little progress was made. Given the high priority the Biden administration is giving to climate change, there is now a real opportunity to improve corporate disclosures on climate change.

Of course, the naysayers haven’t gone away, such as Rep. Anthony Gonzalez (R-Ohio) who argues that the motivation behind mandating sustainability-related disclosures is to solve political or moral problems and not to protect investors. Yet investors, such as Climate Action 100+  a group of 545 investors representing $52 trillion in assets, have been clamoring for better corporate disclosure on climate change for many years.

Or subcommittee ranking member Bill Huizenga (R-Mich.) who claims that expanded disclosure requirements would add regulatory burdens for publicly listed companies and discourage private companies from going public. Yet companies are increasingly making voluntary disclosures based on investor demands and a recognition that climate change is something that will affect their ability to create value for their shareholders over the long term. The Business Roundtable, hardly a far-left group of polar bear lovers, has issued its position on climate change which states that “Unchecked, climate poses significant environmental, economic, public health and security threats to countries around the world, including the United States.” Disclosures on the effects of climate change are an important part of the IBC/WEF Initiative, a global group of CEOs from some 120 leading companies, supporting stakeholder capitalism.

The remarks of Gonzalez and Huizenga reveal a certain irony, and one common with many of their fellow members in the GOP. They are taking the position that those concerned about climate change are doing so from an ideological, rather than science-based, stance. Yet they are the ones arguing based on ideology, perhaps not surprising in a party that is becoming increasingly untethered from reality.

Back in the real world, progress is being made on many fronts when it comes to climate change. The part I’m most familiar with is accounting and reporting. As I’ve written about before, the Trustees of the IFRS Foundation have proposed establishing a “Sustainability Standards Board” (SSB). They received 577 comment letters from investors, companies, accounting firms and associations, other trade and professional associations, governmental bodies, regulatory organizations, multilateral organizations, NGOs, and academics showing overwhelming support for this idea.

Standards for reporting on climate change would be a top priority if the SSB gets established. It is highly likely that it will be. The International Association of Securities Regulators (IOSCO), of which the SEC is a member, has expressed its strong support. In the U.S., Acting SEC Chair Allison Herren Lee and Acting Head of the Division of Corporation Finance John Coates have expressed support for sustainability disclosures,  each with an explicit reference to climate change. They have also indicated support for the SSB.

The Trustees have a board meeting on March 2-4. “Given the growing and urgent demand, the intention would be for the Trustees to produce a definitive proposal (including a road map with timeline) by the end of September 2021, and possibly leading to an announcement on the establishment of a sustainability standards board at the meeting of the United Nations Climate Change Conference COP26 in November 2021.”

I am optimistic about this meeting. I am also optimistic about U.S. support—not only from the SEC, but also U.S.-based investors and companies. While disclosure alone is not a silver bullet—government policies, a price-appropriate tax on carbon emissions, and innovation are also essential—it is an important step for enabling the private sector to do what it can to adapt to and mitigate the effects of climate change.

I have no illusion that those who don’t believe in climate change are going to change their minds. They don’t have to. They can continue to live in the vast fantasy world they are building for themselves along many dimensions.  The rest of us will get on with the important work that needs to be done to meet the challenges and opportunities from climate change.