Rena S. Miller, Gary Shorter and Nicole Vanatko authored this CRS report: (20 April 2021): 'Climate Change Risk Disclosures and the Securities and Exchange Commission' .
Looks like a fascinating topic...
Download CRS_Report_CC_RiskDisclosures_SEC_20April2021
Summary
Potential risks to the U.S. financial system from climate change have attracted growing attention in government, academia, and media, raising questions about the roles of financial regulators in addressingsuch risks. Scientific assessments have concluded that human activities—and particularly carbon dioxide and methane emitted by fossil fuels, agriculture, and land use change—are extremely [>95% likelihood] likely the primary driver of the rise of global average temperature since 1950. Climate change—defined by the Federal Reserve as “the trend toward higher average global temperatures and accompanying environmental shifts such as rising sea levels and more severe weather events”—may impact multiple financial regulators’ responsibilities, including those of ensuring financial stability. Risks from climate change may belong to the category of physical risks, such as heavier and more frequent storms or wildfires that impose direct losses. Or they may consist of transition risk, meaning the risk that changing government policies or market perceptions might lead to sudden asset price drops, such as for carbon-emitting industries. A 2020 report by the Commodity Futures Trading Commission (CFTC) found that climate change could pose systemic risks to the U.S. financial system.
The Securities and Exchange Commission’s (SEC’s) mission is to protect investors; maintain fair, orderly, and efficient markets; and facilitate capital formation. As part of this mission, the SEC issued “Guidance Regarding Disclosure Related to Climate Change” in 2010 to assist publicly listed companies in evaluating when climate change risks require disclosure. However, the 2020 CFTC report concluded that the 2010 SEC guidance has not resulted in high-quality disclosure of climate change risks across U.S. publicly listed firms, and that it should be updated in light of global advancements over the preceding 10 years. The amount of money involved in adequate disclosure of risks from climate change for equity investors is potentially large. The total market capitalization of the U.S. stock market at the end of 2020 was about $50.8 trillion. Some studies have estimated the dollar risks from undisclosed climate-related risks to also be large. Two central questions are whether, and to what degree, emergent climate change risks are of material importance to investors, and to what degree current disclosures of climate change risks have been useful to investors. A 2018 GAO report examined the steps taken by the SEC to aid companies’ understanding of the disclosure regime for climate-related risks. GAO observed that some filings had climate-related disclosures that used boilerplate language that was not company-specific and thus lacked quantification. Recent comments from SEC officials indicate the agency is examining updating its 2010 climate guidance.
The SEC also appears to be reexamining disclosures by “Environmental, Social and Governance” (ESG) funds. Though there is no legally-binding definition of what constitutes an ESG fund, the term refers to portfolios of equities and/or bonds—typically mutual funds—for which environmental, social, and governance factors are integrated into the investment process. The SEC’s Division of Investment Management has primary responsibility for administering the Investment Company Act of 1940 (15 U.S.C. §§ 80-1 et seq.) and the Investment Advisers Act of 1940 (15 U.S.C. §§ 80b-1 et seq.) which includes developing regulatory policy for investment companies (such as mutual funds) and for investment advisers. The SEC does not have rules that specifically govern the use of ESG principles or their disclosures relevant to climate change. In recent years, funds marketed to investors as “ESG” have grown markedly in terms of assets under management. Recently, the SEC announced creation of an ESG Task Force to analyze disclosure and compliance issues relating to ESG strategies. In April 2020, the SEC’s Division of Examinations warned that its review of ESG funds had found a number of misleading statements regarding ESG investing processes and adherence to global ESG frameworks, among other issues.
Enjoy!
“In the long run we are all dead.” - John Maynard Keynes
Comments