SEC told to mandate rigorous climate risk disclosures

Investors did not receive sufficient information about climate change risks faced by Texas power companies before this winter’s devastating power outages, according to a new report from the Environmental Defense Fund and the Brookings Institution.

Winter storms that hit Texas in February caused power outages that lasted for days, led to the deaths of more than 150 people, and caused billions of dollars in damages.

The EDF and Brookings reviewed SEC filings of seven Texas companies – three publicly-traded power generators and four publicly-traded utilities – for their report, What Investors and the SEC Can Learn from the Texas Power Crises.

They found that this year’s Texas power crisis was a foreseeable possibility, but that possibility – and increased risk from climate change in general – was not rigorously acknowledged in the companies’ financial disclosures.

“The problems that led to this year’s deadly blackouts were extreme, but they are not unique to Texas. The Securities and Exchange Commission (SEC) must require better information if we’re going to protect people across America from future disasters, and that includes climate-related risk disclosures that don’t leave investors and communities in the dark,” said EDF lead counsel and director of climate risk strategies Michael Panfil.

“We must prevent future tragedies like what occurred in Texas, and in order to do that we must act quickly to, among other things, strengthen our regulations for rigorous and reliable climate risk disclosure.”

“Scholars have been amassing evidence that financial markets know very little about how companies and municipalities are exposed to the physical impacts of climate change,” added David Victor, professor of innovation and public policy at the UC San Diego School of Global Policy and Strategy and non-resident senior fellow at the Brookings Institution.

“Extreme events like what happened in Texas could become more common with climate change and offer a window into what firms are telling the markets about their physical exposure.”

The SEC requires public companies to file 10-Ks each year that disclose financial risks and plans to address them. However, climate-related risks are often neglected compared to more traditional financial risks, according to the report.

The report found “consistent underreporting of climate-related risks” which has resulted in investors, suppliers, customers, and the public receiving information that is “generic and of essentially no value.”

The report found that the SEC must mandate climate risk disclosures that are rigorous and reliable to elicit a full and transparent accounting of climate-related risks. Specifically, the report recommends the SEC:

  • Require disclosure of relevant climate-related information needed to make informed business decisions.
  • Recognise that the current system of voluntary disclosure is insufficient, and make climate risk disclosure mandatory.
  • Align disclosure requirements with advances in climate science.