The U.S. Securities and Exchange Commission weighs in on climate change.

For decades, Federal agencies – NOAA/DoC, DoE, DoI, EPA, NASA, NSF, and USDA among them – have been tasked with funding and conducting climate change research as well as developing associated technologies. The accumulated environmental intelligence has been used to guide US domestic policy formulation as well as US participation in the international IPCC process. Corporations, notably but by no means exclusively those in the energy sector, have been tracking (and in some cases contributing to) the scientific developments throughout the period, using the information to assess their climate-sensitive market positions and futures and adjust their strategic decisions and actions accordingly. In the process, businesses have varied in their enthusiasm for sharing such information with their stakeholders and their diligence in doing so.  

Transparency may not be simply left to corporate preference much longer. In 2022, the U.S. Securities and Exchange Commission is set to join the club of federal-agency actors. Its intent? To increase broadly the climate-risk information available to investors, and to level the playing field. In a statement dated March 21, SEC Chair Gary Gensler opened this way:

Today, the Commission is considering a proposal to mandate climate-risk disclosures by public companies. I am pleased to support today’s proposal because, if adopted, it would provide investors with consistent, comparable, and decision-useful information for making their investment decisions and would provide consistent and clear reporting obligations for issuers. 

Over the generations, the SEC has stepped in when there’s significant need for the disclosure of information relevant to investors’ decisions. Our core bargain from the 1930s is that investors get to decide which risks to take, as long as public companies provide full and fair disclosure and are truthful in those disclosures. That principle applies equally to our environmental-related disclosures, which date back to the 1970s.

Today, investors representing literally tens of trillions of dollars support climate-related disclosures because they recognize that climate risks can pose significant financial risks to companies, and investors need reliable information about climate risks to make informed investment decisions. For example, investors with $130 trillion in assets under management have requested that companies disclose their climate risks.[1] Further, the 4,000-plus signatories to the UN Principles for Responsible Investment—a group with a core goal of helping investors protect their portfolios from climate-related risks—manage more than $120 trillion as of July 2021.[2]

There’s more to this statement (which merits a thorough end-to-end read), and there’s a growing body of analysis on its significance, as corporations read the tea leaves. The fate of this SEC initiative is uncertain. Not all SEC commissioners are supportive or feel it necessary. And in the wider world, opinions also vary. For example, the Financial Times generally favors the idea, while the Wall Street Journal is skeptical.

Until now, investors have faced a frayed, thin patchwork quilt of information on which to base this aspect of their portfolio risk management. But the SEC has concluded that the climate-change stakes have been rising, and are now so high and so widespread across all economic sectors, that regulation is needed to protect the integrity of financial markets. They’ve concluded that in this area, as in so many others, openness is required to level the playing field for investors.   

All this has implications for the so-called Weather, Water, and Climate Enterprise, defined by the National Weather Service as follows: The Weather, Water, and Climate Enterprise, also known as the Weather Enterprise for short, is comprised of three main sectors that contribute to the science and application of weather and weather forecasting — academia, government, and America’s Weather and Climate Industry. Many firms will choose to develop their climate-risk business analyses in-house. But others will outsource the work to consulting firms. In either event, demand for professionals with the needed geosciences-business-financial expertise to carry out the required analyses will only grow.

Historical precedent from a half-century ago suggests how events might play out. The 1969  National Environmental Policy Act (NEPA) required a so-called environmental impact statement (EIS) accompany institutional or individual actions “significantly affecting the quality of the human environment”. An EIS describes environmental effects of a proposed action (whether negative or positive). Usually an EIS will also supply one or more alternatives to the proposed action. That Act and the 1970 establishment of EPA and NOAA by President Nixon transformed the private-sector weather and climate industry. Prior to that time, consulting meteorologists worked primarily as individuals or in small groups. But corporate need for help in the preparation of EISs led to the establishment and growth of large firms[1]. Private sector meteorology continues to grow until this day. It’s not hard to imagine that the greater complexity of assessing climate change risk to businesses and the higher dollar stakes would trigger a new growth spurt.

This poses opportunity and threat for current members of the Weather Enterprise. Companies will have to bulk up and restructure if they are to capture the new business. New startups can be expected to nimbly move in. At the other end of the spectrum, Amazon, Google, Microsoft and others could decide the business opportunities have finally reached scale sufficient to be of interest. University departments will prosper to the extent they can educate and prepare early-career professionals for the new job opportunities. In many cases this will require that students master multiple disciplines and trans-disciplinary work, the harnessing of data analytics and artificial intelligence, and more. Information providers will be attempting closer, more sustained collaboration with information users. Domestic-business focus will give way to international reach. Professional societies will have to retool to keep pace with evolving member needs.

Whether or not this particular SEC initiative reaches fruition, the handwriting is on the wall. The stakes are existential. For all parties, under all scenarios, it’s time to think through the implications and act.

[1]Notably including Environmental Research&Technology, Inc., founded by James R. Mahoney in 1969. That firm was disestablished in the 1980’s but in its heyday employed some 700 workers.

This entry was posted in Uncategorized. Bookmark the permalink.

2 Responses to The U.S. Securities and Exchange Commission weighs in on climate change.

  1. Bill:-

    Three points:

    • In principle, I support the concept of informing investors about climate risks; but we live in an unprincipled world. On what basis does a company judge its climate risks? Unvalidated models that don’t seem to match reality very well? Local weather trends? The possibility of lawsuits from demagogic attorneys?

    • I also have some experience with NEPA. You’re right – preparing EIS’s and EA’s has become a business, but increasingly one of dubious value. These documents have gone from targeted and [relatively] pithy documents of 50-100 pages to bookshelf-bending multi-volume tomes that no sensible person really wants to read. As a result, a well-intentioned approach that once delayed projects by only a few months now places roadblocks in front of even the most worthwhile that take years (and in some cases a decade or more) to surmount. The lawyers may love NEPA, but those of us who want to see our infrastructure brought up to snuff before our own candles are snuffed out keep hoping that we can find a better way. And we want to add this to our financial statements because …

    • I’m seeing this word “existential” way too much, especially with regard to the climate. If the pandemic and the potential for Armageddon inherent in the war in the Ukraine have done nothing else, they should have schooled us in what is truly “existential.”

    Having said all that, my congratulations on once again being the intellectual provocateur we all appreciate!

    • William Hooke says:

      🙂 Thanks so much for this wisdom, John. My apologies for the slow response. Some family health issues have claimed my attention for the past several weeks. continuing best wishes.

Leave a Reply

Your email address will not be published. Required fields are marked *