The Securities and Exchange Commission (SEC) may require corporations to assess and disclose the impacts of global warming and climate change policy on their bottom lines, today’s Climate Wire (subscription required) reports. The story indicates that Commissioner Elisse Walter is the key proponent inside the SEC. The big outside push–no surprise–comes from Ceres, the eco-sustainability investment network. Wisconsin insurance regulator Sean Dilweg and Maryland Treasurer Nancy Kopp are also cited as leading advocates of SEC-mandated “climate risk disclosure.”
Climate Wire rightly notes that, “The move would drive the government deeper into the climate debate, potentially reshaping management decisions at companies across the country.”
The prospect of SEC-required disclosure of climate risk scares the bejesus out of fossil energy producers and energy-intensive manufacturers, Climate Wire indicates:
Big emitters like oil and gas companies, for example, might have to formally reveal the output of their greenhouse gases and the disadvantages they face from federal efforts to charge polluters for every ton of carbon that’s released.
Even more, the revelations could spark financial fallout. Institutional investment groups with trillions of dollars in assets could use the disclosures as the basis for withdrawing money from companies they consider unprepared for rising risk related to regulation and climatic convulsions.
In reality, there is little risk to company bottom lines from climate change per se. Even if one makes the questionable assumption, for example, that global warming will measurably intensify tropical storms over the next few decades, climate risk will always exceed climate change risk by a wide margin. For instance, due to completely natural climatic factors, a company in Florida has a much greater vulnerability to hurricane strikes and damages than a company in Ohio, regardless of how climate changes. Yet this does not stop people and businesses from moving to Florida, enjoying good weather most of the time, and building a prosperous society.
No, the really serious climate risks are policy-related. For example, the application of Clean Air Act permitting rules to stationary sources of carbon dioxide (CO2) emissions–the inescapable consequence of EPA establishing greenhouse gas (GHG) emission standards for new motor vehicles in response to the Supreme Court’s April 2007 Massachusetts v. EPA decision–would potentially expose 1.2 million previously unregulated firms to new controls, paperwork, penalties, and litigation.
Moreover, the endangerment finding prerequisite to EPA adoption of GHG controls for motor vehicles could also compel the agency to promulgate National Ambient Air Quality Standards (NAAQS) for GHG-related “air pollution.” Logically, NAAQS for GHGs would have to be set below current atmospheric levels and, thus, could not be attained even if EPA shut down every car, power plant, and factory in the United States.
Once the regulatory cascade starts, climate policy risk to the U.S. economy could function as a gigantic, permanent, Anti-Stimulus Package. For the gory details, see my comment on EPA’s Endangerment Proposal, especially pp. 33-48.
It’s not enough for Ceres and other eco-zealots to clobber big emitters and industrial energy consumers with costly regulation. They also want those companies to scare away investors in advance of climate regulation via public disclosure of the potential burdens.
However, the Ceres strategy could backfire. If the SEC adopts the Ceres plan, targeted corporations should use the mandated information to publicize the destructive impacts of climate regulations on jobs, growth, investment, and shareholder value. Such information would reveal that the risks of climate policy vastly outweigh the risks of climate change. It could and should fuel a broad-based political backlash against the self-anointed saviors of Planet Earth.
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Mr. Lewis’ article completely overlooks the broad support for disclosing and addressing climate change risks from both institutional investors and corporations themselves. Last month 41 public pension funds, state treasurers, controllers, comptrollers and asset managers sent a letter requesting that the SEC require better corporate disclosure of climate and other environmental risks; these were some of the nation’s largest institutional investors managing about $1.4 trillion in assets.
These investors are not seeking better disclosure on climate change risks for divestment purposes. They shed that approach decades ago because they realized it was more effective to engage with individual companies as a way to protect their overall portfolios, which are closely tied to the health of the economy due to their sheer size and diversification.
These investors are with their companies for the long haul, but they want to be sure businesses are focusing on the far-reaching business ripples from climate change, whether from new regulations, physical impacts or growing global demand for low-carbon products and technologies. And as we've seen so clearly with the financial crisis, asymmetric information is one of the key causes of market failure.
Also, it is not only climate risks that investors care about. They want to see their portfolio companies capitalizing on opportunities by getting out in front of the global economic transition to a low-carbon future – a transition legendary venture capitalist John Doerr calls the “biggest economic opportunity of the 21st century.”
As for Lewis’ assertion that climate policy risks are the bigger threat to companies, some companies are already facing significant climate-related physical risks to their capital assets and operations. Drought-induced water shortages have already caused power plant shutdowns in Europe, Brazil and the Southeast U.S. that led to price spikes and reduced economic growth. Stronger coastal storms are causing record losses for insurers and oil companies, including $40 billion in losses from Hurricanes Ike and Gustav alone last year in the U.S. Companies, such as Starbucks and Levi Strauss, that depend on coffee, cotton and other agricultural products also face physical risks in their supply chains.
Finally it’s not just investors that see the advantages of companies addressing and disclosing climate risk. The world’s largest corporations see the advantages as well. For example, the PriceWaterhouse Coopers 12th Annual Global CEO Survey, published earlier this year, which surveyed 1,124 CEOs from more than 50 countries, found that the majority of CEOs are already adjusting how they manage risk in response to climate change or are planning to do so in the next 12 months. In other areas, CEOs are also making changes and are already seeing returns on their investments through innovation in products and services and through adjustments in day-to-day operations. And over 1,500 corporations worldwide disclose climate risk and other environmental data in voluntary sustainability reports.
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