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Biden plan to make companies disclose climate risks key to decarbonization

Democratic presidential candidate Joe Biden has pledged to make publicly traded companies disclose their climate risks and emissions levels, a move experts say could help companies, investors and regulators make better-informed decisions and pursue decarbonization targets.

Biden has said that if he wins the White House he will set the U.S. on the path to achieving net-zero greenhouse gas emissions by 2050. As part of his climate objectives, Biden would require public companies to disclose climate risks and the greenhouse gas emissions in their operations and supply chains. Legal experts believe that Biden would accomplish this by directing Wall Street's top regulator, the U.S. Securities and Exchange Commission, to make climate disclosure mandatory for the public companies it oversees. The SEC is an independent agency with five Commissioners who are appointed by the U.S. president with the advice and consent of the Senate.

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Democratic Presidential candidate Joe Biden has pledged to make companies disclose their climate risks if he is elected.
Source: Joe Biden For President Campaign

While an increasing number of U.S. companies are publishing climate reports, the federal government has yet to require such disclosures and investors have repeatedly said the information companies provide is not easily compared across industries or even within sectors.

"There is a growing sense among investors that they're not getting the information that they need," said Andy Green, managing director of economic policy at the Center for American Progress, a left-leaning think tank based in Washington, D.C.

Inconsistent disclosure practices and a plethora of voluntary reporting frameworks have led some investor advocacy groups to call on the SEC to update its 2010 climate disclosure guidance with a rulemaking. More broadly, dozens of entities, academics and asset managers in 2018 petitioned the SEC to establish mandatory reporting on environmental, social and governance issues.

"Disclosure on climate risk has definitely been improved due to mounting pressure from investors for voluntary disclosures ... but unfortunately, voluntary disclosure still falls short," said SEC Commissioner Allison Herren Lee, a Democrat, in a Sept. 29 webinar on climate risks for financial regulators hosted by sustainability nonprofit Ceres. Voluntary disclosure is "spotty" in that not everyone does it, the process is not standardized and reports "can lack reliability because there's no requirement for third-party verification," she said. "Sometimes we see these kinds of disclosures being prepared by a company's public relations or marketing department instead of through more traditional disclosure channels."

The SEC in August updated its financial disclosure requirements and expanded its definition of material information to include human capital management practices and supply chain arrangements when these play a significant part in the company's working capital practices. Although the SEC received comments asking it to include climate change in the expanded list, the agency declined to do so.

Lee said she would support the agency considering making climate disclosures mandatory. This process would start with a task force talking with companies and market participants "to begin to build up what a mandatory regime should look like," she said.

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Not everyone at the regulator is onboard with mandatory and uniform ESG reports, however.

SEC Commissioner Hester Peirce, one of two Republicans on the agency's top panel, has been a vocal skeptic about the push for companies to detail more information about their ESG opportunities and risks. In a September speech, Peirce acknowledged why issuers and investors would want a "nice, neat set of ESG metrics," but raised concern that the "reality would not be as wonderful as some advocates imagine."

"As a securities regulator, I see it as part of my job to defend our principles-based disclosure framework from attacks, even well-intentioned ones that are clothed in 'this time really is different' rhetoric," Peirce said. "If we allow our disclosure regime to address the specific desires of each special interest group, we will increase the costs of being a public company, weaken our focus on investor protection, and stray from our agency's mission."

The disclosure push from Capitol Hill, state regulators

In Congress, some Democrats have continued to push for a uniform ESG disclosure regime like the one being implemented in Europe. Rep. Juan Vargas, D-Calif., introduced a bill in 2019 that would have required the SEC to mandate ESG disclosures from publicly traded companies while also deciding on what exactly those ESG metrics cover. The Vargas bill passed the House's Financial Services Committee in September 2019, but has not yet passed the full chamber

Another Democrat-backed bill called the Climate Risk Disclosure Act reintroduced in both chambers in 2019 by Rep. Sean Casten of Illinois and Sen. Elizabeth Warren of Massachusetts would go one step beyond having the SEC mandate companies report their climate risks. That bill would require that companies report their direct and indirect greenhouse gas emissions and their fossil fuel-related assets. The bill would also have the SEC establish a social cost of carbon that companies would use in their financial analyses.

"While progress has been made in this area thanks to voluntary disclosure frameworks and work by foreign regulators, the lack of standards, and differences among standards, remains a barrier to effective climate risk management," the Commodity Futures Trading Commission's Climate-Related Market Risk Subcommittee recently wrote in a report that was commissioned by the derivatives regulator. "A common set of definitions for climate risk data, including modeling and calculation methodologies, is important for developing the consistent, comparable, and reliable data required for effective risk management," wrote the group of finance, agriculture and energy executives and professionals who make up the subcommittee.

But even if the federal government does not mandate climate disclosures, a number of state-level regulators have already moved to either adopt or start proceedings regarding a mandate, including utility regulators the New York Public Service Commission and the California Public Utilities Commission, and insurance regulator the New York State Department of Financial Services.

The SEC's Lee and other experts suggested that disclosure is key to a clean energy transition.

"Like anything in business, what gets measured gets managed," said Steven Rothstein, Managing Director of the Ceres Accelerator for Sustainable Capital Markets, a Ceres initiative focused on prompting climate-friendly practices and policies for capital markets.

"Whether it's the president of the United States or of a company, you can't set a goal if you don't have the numbers," Rothstein said.