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Investors Need to Know About Climate Risk

March 30, 2021, 8:00 AM

Last year, Hurricane Laura destroyed $19 billion worth of Gulf coast timber, sugar cane, businesses, and homes. Western wildfires left $16.5 billion worth of property in ruins. And sudden windstorms leveled $11 billion worth of Midwest communities and crops.

Nationwide, these and other disasters made worse by climate change have done more than $600 billion worth of damage over just the past five years, part of the rising economic fallout of climate change. And a group of the world’s largest corporations has predicted climate change could cost them close to $1 trillion in the coming years.

That leaves investors exposed too, unless we better understand how rising seas, heat waves and increasingly devastating wildfires, storms and floods are putting companies—and the capital invested in them—at escalating and often hidden risk.

That’s a perilous gap the Securities and Exchange Commission should move swiftly to narrow, by requiring publicly traded companies to disclose their climate risks and explain how they intend to mitigate them. That can help protect investors, promote the efficient allocation of capital, and safeguard the stability of the financial markets.

On March 4, the SEC named a task force to address this urgent need, and the Senate Banking, Housing and Urban Affairs Committee held a hearing on the issue on March 18. And President Biden’s pick to lead the SEC, Gary Gensler, appears to see the light.

“In 2021, there’s tens of trillions of dollars of invested assets that are looking for more information about climate risk,” Gensler said during his recent confirmation hearing. “And I think then the SEC has a role to play to bring some consistency and comparability to those guidelines.”

Investors Need More Information on Climate Risks

Since the first joint stock companies were formed four centuries ago in Amsterdam and London, investors have insisted on the information they need to balance the promise of profit against the portent of risk. It’s part of the SEC’s mission to ensure that investors have that information to promote trust in the integrity of the market. The climate crisis has created an entire universe of risk that today’s disclosure requirements don’t fully capture.

Climate-related disasters, of course, can threaten a company’s operations as well as its facilities, as flooding, crop failures, fires and more endanger supply chains, power providers and the health and availability of staff.

Climate change can also hurt sales. Coal, oil, and gas producers are at obvious risk, as we cut our reliance on fossil fuels and shift to cleaner, smarter ways to power our future. So, too, are energy-intensive industries like airlines, shipping companies and makers of steel, paper and cement, as well as companies engaged in deforestation.

Many banks are at risk, depending on the share of their outstanding loans exposed to, for example, fossil fuel companies, power companies or farms and real estate threatened by climate impacts, and these institutions are taking note.

Beyond that, consumers of conscience want to support companies that fight climate change by cutting the carbon footprint of their operations and products. Failing to do so can damage a company’s brand.

And, increasingly, investors want to align their portfolios with their values, rewarding climate leaders and leaving the laggards behind. If a company imperils our future, after all, it’s the business model that needs to change.

Strategies to anticipate and mitigate risk can create opportunity, and investing with purpose can help drive progress, as millions of savers are finding.

U.S. investors poured a record $51.1 billion last year into ESG funds, which invest in companies that promote environmental, social and corporate governance goals. That was nearly 10 times the amount of ESG investment just two years earlier, and it raised the total investment in the sector to more than $236 billion.

With low-income communities and people of color suffering disproportionately from climate hazard and harm—and, for that matter, owning essentially no stock, while 88% is owned by the wealthiest 10%—rigorous ESG investing has the potential to become a way to drive capital where it’s needed most.

As the stakes in such investments rise, so does the need for companies to lay out in a clear, consistent, and comparable way the climate risk they face and what they’re doing about it.

Partial Disclosures Are Not Enough

The SEC took a step in that direction in 2010, but its guidance wasn’t specific enough, or enforced robustly enough, to do the job. As a result, some companies disclose some climate risks, while others do so in a perfunctory way or not at all.

Investors shouldn’t be left in the dark about the climate risk lurking in the portfolios relied on to fund college, retirement, or financial security. Companies that rely on support from the public have a duty to report their plans for addressing the central environmental challenge of our time. And we all have the right to know the truth about the rising stakes the climate crisis poses to our families, communities, and future.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

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Author Information

Doug Sims is the director of green finance with the Natural Resources Defense Council, an environmental advocacy group with more than 3.3 million supporters nationwide.