Companies in the U.S. have largely been able to dodge having to disclose ESG risks such as those related to climate change, but that time is quickly nearing an end.
Whether through new regulations under a Joe Biden administration, market forces or a combination of both, all signs point to a sea change. More disclosures — and allowing the market to dictate what is material or not — will provide investors with more tools to make sound long-term decisions.
Mr. Biden made addressing climate change a key pillar of his campaign and pledged to rejoin the Paris Agreement climate accord; Senate Democrats are pushing the Securities and Exchange Commission to do more on climate risk; and the Federal Reserve added climate change as a key risk to financial stability in a report earlier this month, so the drumbeat is growing louder.
Sen. Elizabeth Warren took issue with the SEC not requiring all publicly traded companies to report on their climate-related risk, even if those companies have nothing to report. "Right now we've got these huge gaps in the SEC's disclosure rules that basically allow a company either to conceal or to downplay climate risks to their investors," she said.
Opacity is never something investors are looking for in the markets. Starting with uniform disclosure for companies is a good step in at least providing a level playing field for investors. Europe has already provided models of disclosure for investors, managers and companies.
And even if the government and regulators do not take action, the seeds have already been planted. In addition to the seemingly endless number of coalitions backed by trillions of dollars in institutional assets calling for various disclosures and standards, ratings agencies are already making climate risks material.
Moody's Investors Service said ESG factors were a material credit consideration in half of public-sector ratings actions in the past 15 months, and in a separate analysis said 33% of private-sector rating actions cited material ESG factors in 2019.
Morningstar is now formally integrating ESG into its analysis of stocks, funds and asset managers, the research firm said Nov. 17. And a day later, the Partnership for Carbon Accounting Financials unveiled the first global standard for measuring and reporting financed greenhouse gas emissions; nearly 90 financial institutions with a collective $17.8 trillion in assets have committed to measuring and reporting the greenhouse gas emissions associated with their financial activity.
Despite efforts to restrict disclosures, U.S. companies are facing a new world order where disclosure, and more importantly, plans to adapt and mitigate risks, are crucial.
