Climate Risks of Investments Should Be Disclosed
In 2018, Pacific Gas and Electric estimated that the rise in wildfires, partly driven by climate change, could cost the company $2.5 billion in payouts for recent fires started by its electricity transmission lines and other operations north of San Francisco, and as much as $15 billion in the future.
The company was wrong. The next year, PG&E filed for bankruptcy protection as it faced an estimated $30 billion in liability after company power lines ignited some of the most destructive fires in California history.
At least PG&E disclosed its perceived risks, however off target. Not every company tells its investors about the climate-related risks it faces. This is a shortcoming in government efforts to protect Main Street investors as the planet continues to heat up.
For investment managers like me, who oversees New York City’s pension funds, understanding those exposures is essential to mitigating risk across our portfolio to secure strong returns for the city’s public-sector workers. Yet under the current regulatory framework, investors are largely in the dark about those perils.
Fortunately, the Securities and Exchange Commission, under the leadership of its chairman, Gary Gensler, is considering a strong proposal for mandatory climate-risk disclosures by publicly traded companies. Although the agency has argued in the past that some of this information should be acknowledged under existing regulations, this rule would give investors standardized information to evaluate the financial risks of potential liability; damage from rising seas, higher temperatures and other climate consequences; shifts in public policy; and climate-related market shifts.
This is an important step. The United States is following Britain, France, Japan, Brazil, Switzerland, Canada, New Zealand and other countries in moving to mandate climate-risk disclosures.
Last year, damage from extreme weather events that each cost at least $1 billion, including wildfires, floods and hurricanes, resulted in $148 billion in damage in the United States alone. A 2019 report by CDP, a nonprofit that measures climate risks, found that those dangers could cost 215 of the world’s leading companies as much as $1 trillion in combined losses, much of it over the next five years. In recent years, climate change has been identified as the area of highest risk to society and the global economy by the World Economic Forum.
As a fiduciary serving over 700,000 public-sector workers and retirees, I oversee a group of investment portfolios with more than $250 billion in assets. My office has taken comprehensive action to address climate risk and invest in climate solutions to achieve net-zero greenhouse gas emissions by 2040. Asset owners of over $130 trillion globally have committed to net-zero goals to protect against systemic risks to their investments.
But achieving these ambitious and necessary goals will require better information for investment decision-making than we currently have. Company disclosures of climate risks are often voluntary, incomplete and inconsistent.
Investors have been calling for more comparable and consistent data. In 2021, 733 investors with $52 trillion in assets issued the Global Investor Statement to Governments on the Climate Crisis — the strongest ever call by major investors for the world’s governments to require mandatory climate-risk disclosures.
The S.E.C.’s proposal is modeled closely on recommendations by a task force of the global Financial Stability Board that have been endorsed by more than 3,000 companies and many nations. Companies would be required to provide clear information on climate-risk exposure and report how they are managing those risks. The comment period for the proposed S.E.C. rule runs through June 17.
There are, of course, voices pushing against these disclosures, including some business trade groups and Republican lawmakers, claiming the requirements are beyond the purview of the S.E.C. or too costly. They are wrong on both counts.
The agency’s mandate is to protect investors. That is exactly what the regulation would do. Using reliable, analogous data required under the rule, investors would be better able to assess climate risk in their decision-making. The cost of assessing and reporting climate risk pales in comparison with the cost of not doing so.
In its latest report, the United Nations Intergovernmental Panel on Climate Change called for an end to continued investments in fossil fuel production, warning that the world is off track to avert the dangers of increasingly extreme weather. It warned: “Climate-related financial risks remain greatly underestimated by financial institutions and markets.”
The S.E.C.’s proposed rule mandating climate-risk disclosures offers an overdue, urgent, realistic opportunity for investors to get better estimates — and act on them — while they still matter.
Brad Lander is the New York City comptroller.