Disclosing financial climate-change risks

Legendary House Speaker Sam Rayburn ushered in the 1933 Truth in Securities Act in the grim depths of the Great Depression. It was based on the principle that the purchase and sale of securities should be an honest bargain, and disclosure its cornerstone.

But business trends change with the times, and today one that Sam Rayburn never heard of — climate change — presents a new major challenge to investors’ bottom lines.

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Investors representing over $1 trillion in assets filed a petition in 2007 requesting that the U.S. Securities and Exchange Commission clarify the types of information public companies should be disclosing about material impacts from climate change. Investors with more than $5 trillion of holdings submitted letters supporting the petition.

That’s just what the SEC did last month in approving new climate-related interpretive guidance for corporate disclosure. It is exactly the kind of “be-prepared” posture that is its mandate. The commission acknowledged what many of us know: that climate change is here, that it is already affecting businesses and their prospects, and that the high-potential opportunities it represents are as much in need of disclosing as potential costs.

Climate change is already guiding decision-making on a massive scale. In the U.S., more than 1,000 cities and towns are carrying out reductions in greenhouse gases. Over two-dozen states have mandates for boosting renewable energy. Over 20 states have mandated greenhouse gas emissions reduction targets.

Companies that address these issues are swooping in to seize the opportunities these actions represent. That’s a positive thing for our economy, but also something material that investors need to know about.

As institutional investors we don’t legislate, but we do have an unwavering responsibility to make rigorous, prudent decisions about the investments we are entrusted with managing.

But analyses of the 10-K filings we depend on have repeatedly revealed widespread disclosure deficiencies. Studies relying on detailed qualitative reviews and sophisticated search engines examining thousands of filings show that disclosures of climate-related information are inadequate and inconsistent.

These disclosure weaknesses represent what investors should dread the most: hidden risk. This is risk that can and does implode in fund portfolios — like the risks deeply embedded in packages of subprime mortgages and credit default swaps that nearly took the world economy down. Digging out from that avoidable debacle will take many years and much pain, particularly for Main Street citizens who depend on functioning credit markets and value stability in 401(k)’s and other benefit funds.

Climate change risk should be different — and will be with a commitment to stay ahead of developments, and regulators like the SEC acting to improve disclosure.

Kopp is the Maryland state treasurer.