A new bill proposed in Congress this week aims to require companies to disclose key information about their exposure to climate change-related risks.
The Climate Change Disclosure Act, introduced by Massachusetts Sen. Elizabeth Warren on Monday, tackles the issue of what companies communicate to their investors about climate risks. The law would require disclosure to the Securities and Exchange Commission the total amount of a company’s fossil fuel-related assets, how the valuation of those assets will be affected by climate change and an explanation of how they are managing risks to those assets. Companies would also be compelled to reveal their total greenhouse gas emissions.
“Climate change is a real and present danger—and it will have an enormous effect on the value of company assets. Investors need more information about climate-related risks so they can make the right decisions with their money,” said Warren, who co-sponsored the bill with Sens. Brian Schatz (D-Hawaii), Edward J. Markey (D-Mass.), Cory Booker (D-N.J.), Sheldon Whitehouse (D-R.I.), Jeff Merkley (D-Ore.), Kamala Harris (D-Calif.), and Kirsten Gillibrand (D-N.Y.).
Under the legislation, the SEC would tailor specific disclosure requirements by industry, with stiffer requirements for fossil fuel companies.
The law would help investors make informed decisions, said Lisa Woll, chief executive of US SIF, a nonprofit dedicated to sustainable investing.
“Investors have been challenged because there is no clear disclosure regime that allows for true apples-to-apples comparisons,” said Woll.
The SEC passed a rule in 2010 that requires companies to include climate risks in their annual filings, but companies have largely ignored the rule and enforcement has been minimal. The SEC had been investigating Exxon’s climate disclosures in the wake of revelations in 2015 that the company had been studying climate change for decades despite publicly casting doubt on the science. It recently announced the investigation had ended and Exxon would face no punishment.
Shareholders have tried to force many of the large oil producers to be more forthcoming with climate risks, but despite decades of putting forth resolutions at annual shareholders meetings, it took until last year for one to be successful at Exxon. The company’s response, however, was a report earlier this year that claimed climate change posed “little risk” to its business.
Warren’s bill aims to promote financial stability by helping the market appropriately assess the risks of climate change, which she said would help push private companies and the government to transition to a low-carbon economy.
Without that transition, Warren said the economic effects of climate change could result in a “global catastrophe that will put the 2008 crisis to shame.”
Currently, climate risks are minimized, which raises the risk of financial fallout if those risks materialize, said Bob Litterman, chairman of the risk committee at Kepos Capital and former head of risk management at Goldman Sachs.
“Today, global subsidies to fossil fuel consumption and production which favor increased carbon emissions dwarf the incentives to reduce emissions—in other words, today’s incentives go in the wrong direction,” said Litterman.
He said the impacts of climate change are quickly gaining notice and some governments are responding with strong incentives to reduce emissions. If there is a sudden realization by markets that the world needs a fast transition to a low-carbon economy, that could shake the markets. Many describe it as the “carbon bubble.”
“Many investors expect a slow transition driven by incentives similar to those in place today, though slowly increasing over time—the reality is much more dire,” said Litterman.
“A realization of the precarious situation facing humanity could easily lead to a recognition that stranded assets such as coal and expensive sources of oil are overvalued.
“Perceptions can change quickly, and investors should be hedging their exposure to this risk.”
Ultimately, its proponents say, the bill could protect both the climate and the economy.
“Our bill will use market forces to speed up the transition from fossil fuels to cleaner energy—reducing the odds of an environmental and financial disaster without spending a dime of taxpayer money,” said Warren.
Litterman said no one knows the “safe” degree of warming, and climate damages may begin to increase exponentially.
“In reality, there may well be a tipping point beyond which human well-being may be catastrophically negatively impacted, forever,” he said. “Not including appropriate incentives to reduce emissions immediately is insane. I do not think investors understand this math.”