A group of 56 investment-industry leaders representing $2.1 trillion in assets applauded the U.S. Securities and Exchange Commission yesterday for taking action to ensure that companies disclose their climate-related risks to investors. The leaders stated that the SEC’s Guidance Regarding Disclosure Related to Climate Change “will provide us with significantly improved information about the material risks and opportunities faced by our portfolio companies.” This reinforces a fundamental principle of the American economy: Investors need transparent information on companies to make informed decisions.
Yet there is a movement in the Senate that would deny investors access to that critical information. Sen. John Barrasso (R-WY) introduced legislation on February 24 that would prevent the SEC from forcing companies to disclose their climate-related risks. His bill is just two sentences long, but would have the disastrous effect of allowing companies to hide information that investors need to make smart decisions.
Sen. Barrasso may not be as famous as Sen. James Inhofe (R-OK), but he has built up a solid record in opposition of any action on climate change, no matter how important. He loudly protested the CIA’s establishment of a Center on Climate Change and National Security, saying, “The CIA’s resources should be focused on monitoring terrorists in caves—not polar bears on icebergs.” This ignores the well-documented fact that climate change will breed terrorists, create more conflict requiring U.S. military action, and hinder military operations. The most recent Quadrennial Defense Review states, for example, that climate change “may act as an accelerant of instability or conflict,” a view that is echoed by 11 retired generals and admirals in the CNA Corporation’s report, “National Security and the Threat of Climate Change.”
Sen. Barrasso doesn’t want the CIA to do their job and now he doesn’t want the SEC to do its job, either. In introducing his legislation, the Maintaining Agency Direction on Financial Fraud Act (the acronym is a reference to the massive Ponzi scheme run by disgraced investment advisor Bernard Madoff), he said, “In the aftermath of [the Madoff scandal], it’s clear that the SEC should focus on its core mission of protecting American investors and maintaining fair markets. Instead, the SEC now wants to devote time and resources to climate change. This is absurd.”
Sen. Barrasso’s reasoning is flawed in two ways. First, he misrepresents the goals of the Securities Act of 1933, which requires that investors receive financial and other significant information concerning securities being offered for public sale. Second, he mistakenly thinks that climate change information isn’t relevant to investors.
The fact is that investors need information on the climate-related risks companies face. The SEC recognizes this, which is why it published “interpretive guidance” on disclosure related to climate change. This guidance doesn’t represent new law, but it does clarify what companies should disclose in their annual reports about their exposure to climate-related risk in terms of both climate change legislation and climate change itself. For example, companies whose business models rely on the ability to freely emit carbon or whose supply chains are especially susceptible to weather-related disruptions should make that information available.
As the 56 leaders told the SEC, investors need this information. Financial markets work best when investors have access to information they can trust. This is why the SEC requires companies to publish audited financial statements.
There is ample evidence that investors also need access to climate-related information. For example, Alexander Bassen and Sebastian Rothe have found that carbon-intensive utilities fare worse on European stock markets than low-carbon utilities. That is, European investors reward low-carbon utilities. This is likely driven, at least in part, by the fact that European utilities face a price on carbon, which drives up operating costs for carbon-intensive utilities. There will certainly be some type of carbon emission limits in the United States in the coming years, which will put the same pressures on American utilities. Investors evaluating utility stocks need to know the utilities’ exposure to these limits and how the limits will affect the utilities’ financial performance.
At the same time, Goldman Sachs Sustain has found that carbon intensity is responsible for large proportions of the difference in stock valuations in certain U.S. industries such as airlines, mining, and utilities. Here again, investors are rewarding low-carbon companies. The likely dynamic is that investors are aware that some industries will be affected by carbon emission limits in the future and are including this calculation in their investment decisions within those industries.
But investors only reward low-carbon companies in certain sectors. Most people are aware that electric utilities have some exposure to carbon emission limits that will affect their financial performance, but not everyone is aware that the food and beverage industry is also relatively carbon intensive (as seen on page 12 of the same Goldman Sachs Sustain analysis). This is where SEC guidance is most critical: in areas where investors aren’t aware of the risks. Food and beverage companies are as carbon intensive as automotive manufacturers, yet relative carbon intensity only explains a small part of valuation differences in food and beverage companies, while it’s hugely influential in how automotive manufacturers are valued.
If Sen. Barrasso’s bill were to become law, investors would remain ignorant of the significant risks in sectors such as the food and beverage industry. Sen. Barrasso may not care that the world’s climate is changing, but his legislation unfairly stacks the deck against people who want access to necessary information before making investments. His bill goes well beyond climate change; it discourages corporate risk disclosure and prohibits responsible investing.
As the investors who manage $2.1 trillion in assets accurately write, “The SEC was founded on the principle that the purchase and sale of securities should be an honest bargain based on full and fair disclosure. The climate change disclosure guidance carries that tradition and legal requirement forward to a pressing challenge facing businesses in this century.”
Congress and the SEC must not bow to pressure to modify or withdraw the Guidance Regarding Disclosure Related to Climate Change.
Richard W. Caperton is a Policy Analyst with the Energy Opportunity team at American Progress.