Sneaky-Strong: Why the SEC’s Climate Disclosure Rule May Be the Most Impactful Climate Policy Ever
May 23, 2022

Securities and Exchange Commission Chairman Gary Gensler has gone out of his way to argue that the Commission is not making “climate policy” in the way that the EPA or other energy or environmental regulatory agencies might. And he is correct – the SEC’s proposed disclosure rule mandates no changes to business energy use nor sets any targets related to greenhouse gas emissions. The Commission is doing what it is supposed to do: ensure that the market has access to consistent and comparable information that may be deemed financially relevant to investors. Certainly, the world’s largest asset manager thinks it is relevant – Larry Fink says that “[c]limate change has become a defining factor in companies’ long-term prospects.”

Smart investors and smart companies look at climate change as they do any other business issue. It presents risks such as acute physical risks like extreme weather, heat waves, and drought; chronic physical risks like rising seas and loss of arable land; regulatory risks that could impose direct costs on companies; stranded assets; and reputational risks that grow with a changing climate and changing demographics. For companies that offer goods and services to serve climate change mitigation and adaptation it presents opportunities for profit. And for companies that minimize risks and demonstrate leadership it offers opportunities in the form of lower costs of capital and the attraction of talent.

So why is the SEC’s disclosure rule likely to be so impactful? Because markets are really good at doing what markets do: rewarding risk management and value creation. No investor prefers to invest in a company that is doing less to manage risk and create opportunity than its peers. And no CEO wants to rank behind her competitors in any comparison. Voluntary disclosure regimes and the increasing number of investors who consider ESG factors (of which climate change is arguably the first among equals) have already driven behavior change by companies. But investors only have the insights they can glean from the subset of companies that voluntarily disclose climate-related information and the information they do get is often difficult to assess and fully compare.

Enter the SEC.

By mandating consistent and comparable disclosure of climate risk factors (and opportunities presented by managing the climate and low-carbon transition), the Commission is simply providing more and better information about more companies to the growing number of investors who are asking climate-smart questions about their asset allocations. And information moves markets. Investors can choose (or not) to use this information to assess value and allocate capital. All issuers will need to ask questions about themselves (How are we managing climate risk? How are we anticipating and seizing opportunities?). And they will be able (as will the marketplace) to compare themselves to their peers. This question-and-answer process, along with public disclosure, will impact how companies seek to address climate change.

And it is implausible that that process will lead any rational company to determine that they need to do less to mitigate climate risk or do less to demonstrate that they understand the opportunities of taking greater climate leadership. This is what I call “Climate Capitalism.” Like any other business issue, if managed well and with an eye toward innovation and improvement, integration of climate change into business strategy will yield value accretion and competitive advantage. Mandatory disclosure will put Climate Capitalism on steroids.

About the Author: Roger S. Ballentine is the President of Green Strategies Inc.

For a recent Forbes article on Roger and Climate Capitalism, read here.

For a recent presentation deck on the SEC Rule, see here.

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