SEC's role in climate change

As the world grapples with the increasing environmental and economic impacts of climate change, many U.S. government agencies have key roles to play.  For example, the EPA must address limits on carbon emissions and FEMA must respond to the needs of those devastated by increasing extreme weather events.  But there's another federal agency with a crucial role and it may surprise you: the Securities and Exchange Commission (SEC).

Why?  Because the SEC’s mission is to “protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.”  This responsibility includes protecting capital markets from systemic risks that threaten the entire economy.  Climate change is just such a risk.

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A 2012 study found that climate change is already costing the world more than $1.2 trillion per year, reducing global GDP by 1.6 percent.  A 2013 NOAA study found that all U.S. coasts are highly vulnerable to the effects of climate change such as sea-level rise, erosion, storms and flooding. The financial risks associated with both private and public hazard insurance in these areas are expected to increase dramatically. 

In 2010, the SEC took an important first step in mitigating these market risks when it became the first securities regulator worldwide to issue guidance to public companies on disclosing their climate change risks, including regulatory, physical and indirect risks. Such disclosure is critical if investors are to assess climate risks in their portfolios, and it encourages companies to understand and develop plans for managing those risks.  Yet few companies provide any meaningful climate risk disclosure.

Many companies face material risks associated with climate change – from supply chain challenges, resource availability, and physical risk to facilities.  But climate disclosure in SEC filings from companies is minimal, according to a new Ceres report, Cool Response: The SEC & Corporate Climate Change Reporting, which analyzes four years of S&P 500 reporting and SEC comment letters.  Although 67 percent of S&P 500 companies briefly mentioned climate change in their SEC filings, rarely do companies provide any specific or meaningful discussion of the material climate risks (and opportunities) they face.

The SEC must act to change this, because only the SEC has the enforcement authority to ensure consistent corporate reporting of material events.  The SEC’s key tool to address this deficiency is the “comment letter,” in which SEC staff evaluate corporate filings from an investor’s perspective and request additional information or clarification.  In 2010 and 2011, the report found that the SEC issued approximately 24,000 comment letters, but in only 49 did it raise questions about the adequacy of climate risk disclosure.  In 2012 and 2013, only three SEC comment letters out of approximately 23,000 discussed climate disclosure.

Significantly, only five of the companies that received climate-related SEC comment letters had a market cap above $5 billion.  Yet these large cap companies face the most significant climate risks and opportunities.

Many large corporations are well aware of their climate-related risks and opportunities.  In 2013, over 80 percent of S&P 500 companies discussed climate change issues on their websites or in other forums.  These companies noted that over 4 percent of their annual capital expenditures were invested in greenhouse gas emissions (GHG) reduction efforts, and they spent an aggregate of $50 billion on a range of emissions reduction activities and energy-savings processes.  But, to ensure that investors receive meaningful information about material issues, information that is consistent and allows comparisons among companies, the SEC must do a more rigorous job of encouraging climate risk disclosure by the companies it regulates.

The Commission should ramp up its scrutiny of climate risk disclosure, using comment letters to drive improved reporting.  The SEC must especially ensure that companies in sectors of the economy with the greatest sensitivity to climate change, including insurance, electric power, oil and gas, and transportation, are not simply providing generalized boilerplate language on climate change but company-specific information on climate-related risks that reasonable investors would consider material.

The SEC should also intensify its collaboration with other federal agencies to improve information sharing about the risks companies face.  A number of agencies have looked closely at these risks.  For example, a 2013 Department of Energy report on energy sector vulnerabilities to extreme weather found threats and opportunities in a number of industries from increasing temperatures, decreasing water availability, and other climate change related events.  Since 2010, the EPA has collected data on GHG emissions from U.S. electric power plants, chemical plants, refineries and other facilities.  The SEC could make valuable use of this data to identify companies and economic sectors where climate risk disclosure is especially critical and subject corporate filings from these companies and sectors to increased scrutiny. By tapping the expertise of other federal agencies charged with analyzing the climate risks facing various sectors, the SEC can better fulfill its unique mission.

We all need an active, vigilant SEC to protect investors and our capital markets from the systemic economic risks posed by climate change. The SEC led in 2010 and can lead again today.

Kopp is Maryland State Treasurer.