Democrats want companies to disclose their climate risks — and fossil fuel industry is worried
Democratic presidential candidates have a sweeping array of proposals to fight climate change, but virtually all the leading hopefuls agree on one relatively simple proposal: forcing companies to disclose the risks they face from a warming atmosphere.
Environmental groups and investors alike say the Securities and Exchange Commission has let oil and gas companies obscure how stricter greenhouse gas regulations and the changing climate could jeopardize their operations. Now, fossil fuel producers worry that a Democratic president would require them to make damaging revelations that would spook investors.
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Presidential hopefuls like former Vice President Joe Biden, Massachusetts Sen. Elizabeth Warren, Washington state Gov. Jay Inslee and former Texas Rep. Beto O’Rourke are all proposing plans to strengthen the SEC’s climate-related disclosure requirements. And other Democrats said it’s about time for the SEC’s regulators to take climate change more seriously.
“They don’t need to be climate warriors, but they should be warriors for shareholders understanding the risk associated with their investments,” Sen. Brian Schatz (D-Hawaii) told POLITICO. “If they’re not requiring one of the fastest growing risks to be accurately accounted for, then they’re not doing their job.”
Biden’s climate plan says he would take executive action on his first day in the White House to require “public companies to disclose climate risks and the greenhouse gas emissions in their operations and supply chains.”
Inslee spokesperson Jamal Raad said the candidate planned to include “increased stringency in climate pollution and risk disclosure” in the detailed climate plans that he has been rolling out. And O’Rourke has said in his climate plan that he would require “public companies to measure and disclose climate risks and the greenhouse gas emissions in their operations and supply chains.”
A campaign spokesperson for Warren pointed to a bill the senator introduced last year that would have required public companies to disclose the volumes of their greenhouse gas emissions and the total values of their fossil-fuel related assets. That bill was co-sponsored by her fellow presidential candidates Sens. Cory Booker (D-N.J.), Kamala Harris (D-Calif.) and Kirsten Gillibrand (D-N.Y.), though it did not advance in the GOP-led Senate.
“Investors need more information about climate-related risks so they can make the right decisions with their money,” Warren said in a statement last year introducing the bill. “Climate change can be an economic opportunity if we act boldly and decisively. But if we don’t, we will see a global catastrophe that will put the 2008 crisis to shame.”
The calls for more disclosure around climate risks aren’t limited to companies’ SEC filings. Last week, Commodity Futures Trading Commission member Rostin Behnam called for the agency to form a subcommittee focused on climate-related financial market risks, and he warned that global warming could spark a 2008-style financial meltdown.
The growing push heightens the stakes of the 2020 election for oil and gas companies, whose fossil fuel assets are worth hundreds of billions of dollars.
“The potential for an extremist ideologue Democrat in the White House weaponizing the SEC and overall corporate governance policies in the context of the environmental, social and governance suite of issues is quite a serious concern among publicly-held companies in the energy sector,” said Stephen Brown, principal at the energy lobbying firm RBJ Strategies LLC. “It impacts the cost of capital and risks micro-management of corporate activities.”
The SEC now recommends that companies disclose their climate change risks, but does not require it and offers no standard for exactly what information they should make public. In 2016, the agency requested public feedback about potentially changing climate-related risks required for disclosure in SEC filings, but since President Donald Trump’s election, action on this front has stalled.
The SEC declined to comment on its climate change disclosure policies.
Danielle Fugere, president of As You Sow, a group that has pushed shareholder resolutions seeking to force Exxon Mobil and other companies to disclose how climate change is affecting their business, said mandating financial reporting in the same way the SEC requires companies to report oil and gas reserves could hurt the balance sheets of those that depend on fuels that emit greenhouse gases.
“If these issues were clearly disclosed according to an SEC format like that which is required for reserves, credit [ratings] could be downgraded sooner rather than later for certain companies,” Fugere said. “I have no idea what level this would rise to but, from a broader economic standpoint, this would appropriately facilitate re-ordering toward a low-carbon transition.”
Even some of Wall Street’s savviest investors have suffered losses because they were caught off guard by the shifts taking place in the energy sector.
Investors in General Electric such as Vanguard, State Street and Fidelity Investments racked up huge losses as the company’s stock tumbled from declining demand for gas and thermal coal turbines and other missteps, according to a recent report by the Institute for Energy Economics and Financial Analysis, a research group that studies the economic transition to cleaner energy systems. And Blackrock, GE’s biggest investor and the world’s largest asset manager, lost $16 billion in the three years between 2016 to 2018 from its holding.
GE’s history could be repeated at other companies in the oil and gas sector, where executives who have been in the same business for decades may not welcome the idea of publicizing information about shrinking demand for their product, said IEEFA analyst Kathy Hipple, who worked on the report.
“It’s a hard to for a man to see something when his livelihood depends on his not seeing it,“ Hipple said.
The Democrats’ proposals on climate disclosure have already caught the attention of the oil industry.
Lobbyists in the energy industry told POLITICO that they are warning clients to reach out to Democrats to press them on the harms publicly traded energy companies would face if the SEC were to force them to produce regular reports of how climate change is affecting their business. Lobbyists are also advising clients what legal actions they could take to slow down any changes at the SEC.
The Trump administration’s SEC has blocked shareholder resolutions aimed at requiring climate risk disclosures, arguing in one case that a climate measure directed at Exxon was an attempt by a subset of shareholders to “micromanage” the fossil fuel giant. It made a similar ruling for oil and gas producer Devon Energy against a climate resolution in March.
The administration also directed the Labor Department in April to look into whether climate-related shareholder resolutions violate laws intended to promote long-term economic growth.
The American Gas Association, American Fuel & Petroleum Manufacturers and other industry groups fought plans to include more information on environmental, social, or governance concerns in disclosures when the SEC floated the idea in 2016 during the Obama administration.
“The SEC should avoid promoting political, social, and public policy objectives, or attempting to drive related corporate behavior advocated by special interest groups,” Exxon Vice President and Controller David Rosenthal wrote in a comment submitted in response to the SEC’s call for comment at the time.
Investor groups support the idea of companies disclosing more information, which they said would help them determine where best to direct their dollars.
“Transparency is what this is about,” said Erika Karp, chief executive of Cornerstone Capital Group, a New York-based investment advisory that advises clients with $1.1 billion in assets. “Transparency can be transformational in both a good way and a bad way, depending on who your stakeholders are. Investors like transparency.”
Part of the worry is that forcing more disclosure could drive up borrowing costs for some companies, analysts said. Moody’s and other corporate credit rating agencies could downgrade companies if the additional disclosure show they are particularly vulnerable to emissions regulations, shrinking fossil fuel sales or physical vulnerabilities from the changing climate, lobbyists said.
Moody’s already takes climate risk into account when analyzing credit ratings for oil and gas companies, managing director Jim Hempstead told POLITICO. The agency is now pitching a service that would assess the individual companies’ risks from any move to a low-carbon economy.
But so far, Moody’s hasn’t found the current disclosures from companies in the sector particularly useful, Hempstead said, especially because it is up to the companies to decide what to release.
“Climate disclosures that are coming out right now are all over the map” in quality, Hempstead said. “If the SEC comes out and says we want this new disclosure, that’s good for us. More disclosure is better than less disclosure. Disclosure that is comparable (among companies), we like that kind of disclosure as well.”
International financial institutions have also amped up their warnings of climate risks in recent months. In mid-May, for the first time ever, the Bank of Canada warned that climate change continues to “pose risks to both the economy and the financial system” and that “fire sales” of fossil fuel assets could destabilize the nation’s economy.
Twenty members of the Senate Democratic caucus, led Schatz and including presidential contenders Sens. Amy Klobuchar (D-Minn.), Bernie Sanders (I-Vt.), Warren, Booker and Harris, asked federal financial regulators, including the Federal Reserve, in January to describe what steps they had deployed to “identify and manage climate-related risks in the U.S. financial system.”