By Andres Vinelli, and Tyler Gellasch
As a result, fossil-fuel companies have increasingly financed their operations through loans and by selling debt securities. The shift in capital raising (and dependency by fossil-fuel industry) has generally shifted from a broad mix of equity capital, bank loans, and debt sold in the capital markets, to a much greater reliance on sale of debt securities.
In this new world, investors simply voting their shares of public company stock—or even divesting their equity holdings—isn’t likely to change corporate behavior. This is why the SEC must also take a closer look at debt.
The fossil-fuel industry has feasted on low interest rates in 2020. To offset the plummeting demand for oil and gas during the coronavirus crisis, many already debt-laden fossil fuel companies have taken advantage of the Federal Reserve’s unprecedentedly low interest rates to sell debt.
A November 2020 report found that oil and gas companies had sold $93 billion in new debt securities since the start of the Federal Reserve’s intervention. Separately, S&P Global Market Intelligence found that the oil and gas companies it follows had raised a whopping $16 billion in June, with $15 billion of that coming from sales of debt. This included $2 billion in long-term debt by Occidental Petroleum Corp. /zigman2/quotes/207018272/composite OXY +5.14% and more than $5 billion by Exxon Mobil Corp. /zigman2/quotes/204455864/composite XOM +2.34% , with some of it not coming due until 2039.
Lack of information
But because the majority of corporate-debt offerings are generally exempt from the SEC’s reporting and rights obligations, it’s not entirely clear what the risks are to investors, creditors, or the public. Much of this debt may lack essential information to identify the long-term risks—including climate-related risks.
It would seem to be impossible for investors to assess the ability of a company such as ExxonMobil, for example, to repay more than $1 billion in 2039 without considering impacts of both climate change itself, but also the global transition away from fossil fuels. And yet, fossil-fuel companies are still able to sell debt at very low interest rates, while their investors are left in the dark.
The SEC must step in and modernize its rules both to adequately disclose climate risk and to ensure that all publicly traded companies are held to the same regulatory standards—as was first intended when the agency was founded. This would not just protect investors, but to help make capital markets work properly. It may prevent climate change-induced economic collapse that could be even more severe than the 2008-09 financial crisis.
If the SEC required companies selling securities to make basic disclosures related to their climate risks and impacts, investors, business partners, and the public could better identify, assess, and address them. Without that information, the true costs and impacts of climate change on securities, companies, and society overall may be unidentified, underappreciated, and inadequately addressed.
Andres Vinelli is the vice president for economic policy at the Center for American Progress. Tyler Gellasch is a fellow at the Global Financial Markets Center at Duke University School of Law .