Requiring Disclosure of Climate Change Risks Makes Sense for Investors, Companies, and the U.S. Economy
U.S. House lawmakers took an important step forward on Tuesday in protecting the American economy from the impacts of climate change.
They advanced legislation that would require all publicly held companies to disclose critical information on climate-related risks in their operations and supply chains. The bill, the Climate Risk Disclosure Act of 2019, is rooted firmly in the principles of transparency, materiality and investors’ needs for adequate information to assure robust long term financial returns.
I was pleased to have been called to testify before House lawmakers last week to voice Ceres’ strong support for this bill. That same day, U.S. Sen. Elizabeth Warren, D-Mass., introduced a Senate companion bill, writing that it will make clear that “climate change represents not just an existential environmental threat to the planet, but a serious threat to our financial system — one that we need to head off now before it costs people their homes, jobs, and savings like the 2008 crisis.”
Ceres has had a long history in the field of corporate disclosure, having launched the voluntary Global Reporting Initiative (now used by more than 13,000 companies worldwide) in 1997. And, in 2010, our Investor Network members successfully petitioned the Securities and Exchange Commission (SEC) to issue the first-of-its-kind climate disclosure guidance.
Despite this guidance, our research shows that nearly half of the 600 largest U.S. companies we have assessed still don’t provide decision-useful disclosures on climate-related risks. Those that do often provide disclosures that are mere boilerplate, or too brief, and therefore effectively meaningless. So investors aren’t getting the information they need to understand how their portfolios are exposed, which in turn exposes them to potential losses.
Investors have consistently said that sustainability challenges pose material financial risks and that an understanding of those risks needs to be embedded into our capital market systems. Disclosure is one method to help markets take these risks into account, and a critical one.
Risks are risks, and they need to be disclosed—whether they come from trade agreements, fluctuating commodity prices, inflation or climate change. That is why Ceres supports the Climate Risk Disclosure Act.
It would require companies to provide clear, consistent and comparable climate disclosures, and help them better understand their own exposures and opportunities. The bill will stimulate corporate ingenuity and strategic thinking, increase competitiveness and create shareholder value. It will also create a level playing field, where all companies provide the same information using comparable metrics. As the business school aphorism states, “What gets measured, gets managed.” When adequate and relevant climate risk information gets measured, companies will manage their risks more profitably.
Our research shows that companies that provide climate disclosures are more likely to set relevant goals, and to have systems in place to make them more resilient in the face of climate change. While we applaud the companies that are showing such leadership, voluntary reporting is simply not enough. The mandatory requirements laid out in the Climate Risk Disclosure Act are carefully designed to meet the needs of investors without unnecessarily burdening companies.
Risks cannot always be avoided, but with the right information, they can be managed. And when the risks are fundamental, as climate risks are for investors and companies, the right information can turn risks into opportunities.
Nearly every sector of the economy is impacted by climate change—from agriculture to transportation to energy to apparel, and on and on. More than 200 of the largest global companies reported almost $1 trillion dollars at risk from climate impacts, with many likely to hit within the next five years, according to CDP. Further, the Intergovernmental Panel on Climate Change projects $54 trillion dollars in damages to the world economy by 2100—and that’s only if we limit average global temperature rise to no more than 1.5 degrees Celsius.
Time is running out. We have less than a decade to act in order to avoid the most catastrophic human and financial impacts of climate change. This legislation will help spur investor and corporate action now—and at the pace and scale required.
It’s time for lawmakers to do something to tackle the greatest economic crisis of our time, and the implications for investors and companies must be disclosed.
Mindy Lubber is the CEO and President of Ceres, a sustainability nonprofit organization working with the most influential investors and companies to build leadership and drive solutions throughout the economy.