President Joe Biden has declared addressing climate change as one of his top priorities. Fighting climate change will entail many billions (if not trillions) of dollars in direct government spending and programs. It will also depend on the actions of private-sector companies.
“ Climate change will impact the bottom line for investors, companies, and entire sectors of the economy. ”
But when it comes to climate risk, companies cannot be expected to regulate themselves. The government must enhance financial regulations to inform and empower market participants to better identify, assess, and address the risk posed by climate change.
SEC’s key role
The Securities and Exchange Commission (SEC) has a key role to play, ensuring that financial regulations account for the growing threat of climate change by enhancing accountability for public companies both in their debt issuing and by improving oversight of unregulated private markets.
Climate change will impact the bottom line for investors, companies, and entire sectors of the economy. Corporations and industries will be affected through the direct impact of natural disasters such as hurricanes, rising sea levels, and through sudden changes in prices and availability of essential inputs throughout supply chains. To make informed decisions about how to allocate capital and manage risks, investors and the public need complete, comparable, and reliable information about companies’ climate risk.
Many companies are beginning to voluntarily make detailed disclosures regarding their energy usage, emissions, and supply-chain risks due to climate change. Still, many investors don’t have enough information to adequately assess this risk.
Public-company disclosures related to climate risks should be standardized and mandated. Investors realize this, and have flooded the SEC with requests for more mandatory disclosures from public companies. But the SEC under President Donald Trump largely ignored these demands. Now, the Democratic-controlled SEC is likely to adopt several basic reforms to the public-company-disclosure regime.
Reduced disclosure requirements
Unfortunately, these efforts are not likely to have nearly the impact most might expect. That’s because, over the past several years, the SEC has repeatedly reduced public-company disclosure requirements and investor rights. At the same time they’ve expanded the number of companies that are exempt from its oversight regime altogether. And outside of the equities markets, the vast majority of corporate-debt securities (including from fossil-fuel companies) is now exempt from the SEC’s initial or ongoing reporting and rights obligations for investors.
“ While disclosure regulations have eroded across industries, the fossil-fuel industry, in particular, has used the weak regulatory environment to keep investors in the dark when it comes to climate risk. ”
When first adopted, federal securities laws required that publicly traded companies provide basic information about their stocks, the company’s governance, finances, and operations. Public companies are also required to permit shareholders to submit proposals for shareholder votes and provide other basic rights to their investors, such as equal access to material information about the company. These requirements are essential to allocating capital to its best uses and providing basic accountability for companies.
While that regulatory regime once covered nearly all capital raised through the sales of securities in the United States, it now accounts for only around 30%. This shift has occurred as Congress and the SEC have created a number of exemptions and exceptions to these disclosure requirements and mandatory investor rights.
While disclosure regulations have eroded across industries, the fossil-fuel industry, in particular, has used the weak regulatory environment to keep investors in the dark when it comes to climate risk.
For years, large fossil-fuel companies successfully fended off shareholder proposals to force them to adapt their business models to address climate change. As the climate crisis has worsened, large shareholders have increasingly demanded changes to corporate behavior, with both their investment dollars (such as through divestment) and through their shareholder votes. Earlier this year, for example, Chevron
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Unfortunately, under the Trump administration the SEC responded by seeking to silence shareholders’ efforts. The new administration should move to quickly stop this practice so that the SEC is able to do its job again to promote corporate accountability rather than limit it.
Investors moving away
But even with incomplete information and weak regulations, investors have already spent a decade moving away from fossil-fuel companies—although because of the lack of climate-risk disclosure it is impossible to say if they are adequately responding. The energy sector has been the worst performing sector in the S&P 500 over the past decade—by a lot. In fact, the sector’s share of the index fell from 13% in March 2009 to just 2.35 as of Dec. 24, 2020.
As a result, fossil-fuel companies have increasingly financed their operations through loans and by selling debt securities. The shift in capital raising (and dependency by fossil-fuel industry) has generally shifted from a broad mix of equity capital, bank loans, and debt sold in the capital markets, to a much greater reliance on sale of debt securities.
In this new world, investors simply voting their shares of public company stock—or even divesting their equity holdings—isn’t likely to change corporate behavior. This is why the SEC must also take a closer look at debt.
The fossil-fuel industry has feasted on low interest rates in 2020. To offset the plummeting demand for oil and gas during the coronavirus crisis, many already debt-laden fossil fuel companies have taken advantage of the Federal Reserve’s unprecedentedly low interest rates to sell debt.
A November 2020 report found that oil and gas companies had sold $93 billion in new debt securities since the start of the Federal Reserve’s intervention. Separately, S&P Global Market Intelligence found that the oil and gas companies it follows had raised a whopping $16 billion in June, with $15 billion of that coming from sales of debt. This included $2 billion in long-term debt by Occidental Petroleum Corp.
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Lack of information
But because the majority of corporate-debt offerings are generally exempt from the SEC’s reporting and rights obligations, it’s not entirely clear what the risks are to investors, creditors, or the public. Much of this debt may lack essential information to identify the long-term risks—including climate-related risks.
It would seem to be impossible for investors to assess the ability of a company such as ExxonMobil, for example, to repay more than $1 billion in 2039 without considering impacts of both climate change itself, but also the global transition away from fossil fuels. And yet, fossil-fuel companies are still able to sell debt at very low interest rates, while their investors are left in the dark.
The SEC must step in and modernize its rules both to adequately disclose climate risk and to ensure that all publicly traded companies are held to the same regulatory standards—as was first intended when the agency was founded. This would not just protect investors, but to help make capital markets work properly. It may prevent climate change-induced economic collapse that could be even more severe than the 2008-09 financial crisis.
If the SEC required companies selling securities to make basic disclosures related to their climate risks and impacts, investors, business partners, and the public could better identify, assess, and address them. Without that information, the true costs and impacts of climate change on securities, companies, and society overall may be unidentified, underappreciated, and inadequately addressed.
Andres Vinelli is the vice president for economic policy at the Center for American Progress. Tyler Gellasch is a fellow at the Global Financial Markets Center at Duke University School of Law.
