By Andres Vinelli, and Tyler Gellasch
President Joe Biden has declared addressing climate change as one of his top priorities . Fighting climate change will entail many billions (if not trillions) of dollars in direct government spending and programs. It will also depend on the actions of private-sector companies.
But when it comes to climate risk, companies cannot be expected to regulate themselves. The government must enhance financial regulations to inform and empower market participants to better identify, assess, and address the risk posed by climate change.
SEC’s key role
The Securities and Exchange Commission (SEC) has a key role to play, ensuring that financial regulations account for the growing threat of climate change by enhancing accountability for public companies both in their debt issuing and by improving oversight of unregulated private markets.
Climate change will impact the bottom line for investors, companies, and entire sectors of the economy. Corporations and industries will be affected through the direct impact of natural disasters such as hurricanes, rising sea levels, and through sudden changes in prices and availability of essential inputs throughout supply chains. To make informed decisions about how to allocate capital and manage risks, investors and the public need complete, comparable, and reliable information about companies’ climate risk.
Many companies are beginning to voluntarily make detailed disclosures regarding their energy usage, emissions, and supply-chain risks due to climate change. Still, many investors don’t have enough information to adequately assess this risk.
Public-company disclosures related to climate risks should be standardized and mandated. Investors realize this, and have flooded the SEC with requests for more mandatory disclosures from public companies. But the SEC under President Donald Trump largely ignored these demands. Now, the Democratic-controlled SEC is likely to adopt several basic reforms to the public-company-disclosure regime.
Reduced disclosure requirements
Unfortunately, these efforts are not likely to have nearly the impact most might expect. That’s because, over the past several years, the SEC has repeatedly reduced public-company disclosure requirements and investor rights. At the same time they’ve expanded the number of companies that are exempt from its oversight regime altogether. And outside of the equities markets, the vast majority of corporate-debt securities (including from fossil-fuel companies) is now exempt from the SEC’s initial or ongoing reporting and rights obligations for investors.
When first adopted, federal securities laws required that publicly traded companies provide basic information about their stocks, the company’s governance, finances, and operations. Public companies are also required to permit shareholders to submit proposals for shareholder votes and provide other basic rights to their investors, such as equal access to material information about the company. These requirements are essential to allocating capital to its best uses and providing basic accountability for companies.
While that regulatory regime once covered nearly all capital raised through the sales of securities in the United States, it now accounts for only around 30% . This shift has occurred as Congress and the SEC have created a number of exemptions and exceptions to these disclosure requirements and mandatory investor rights.
While disclosure regulations have eroded across industries, the fossil-fuel industry, in particular, has used the weak regulatory environment to keep investors in the dark when it comes to climate risk.
For years, large fossil-fuel companies successfully fended off shareholder proposals to force them to adapt their business models to address climate change. As the climate crisis has worsened, large shareholders have increasingly demanded changes to corporate behavior , with both their investment dollars (such as through divestment) and through their shareholder votes. Earlier this year, for example, Chevron /zigman2/quotes/205871374/composite CVX -0.89% shareholders voted to compel the company to disclose its climate-related lobbying efforts .
Unfortunately, under the Trump administration the SEC responded by seeking to silence shareholders’ efforts. The new administration should move to quickly stop this practice so that the SEC is able to do its job again to promote corporate accountability rather than limit it.
Investors moving away
But even with incomplete information and weak regulations, investors have already spent a decade moving away from fossil-fuel companies—although because of the lack of climate-risk disclosure it is impossible to say if they are adequately responding. The energy sector has been the worst performing sector in the S&P 500 over the past decade —by a lot. In fact, the sector’s share of the index fell from 13% in March 2009 to just 2.35 as of Dec. 24, 2020 .