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The Institute for Agriculture and Trade Policy (IATP)1 appreciates this opportunity to respond to some of the questions posed by the SEC in Acting Chair Alison Herren Lee’s March 15 request for public input.2 We do so as the SEC faces opposition rooted in what the late, great climate economist Frank Ackerman called in 2008 “the fear that overly ambitious climate initiatives could hurt the economy. Economists emphasizing that fear have, in effect, replaced the climate skeptics as the intellectual enablers of inaction.”3
This fear can be translated into a Business as Usual claim that “overly ambitious” climate disclosure may hurt SEC listed companies and/or put them at a competitive disadvantage with firms in other jurisdictions not subject to disclosure requirements. Such a fear may be disguised in the all-purpose anti-regulatory claim that climate risk disclosures in the line items of 10-K and 10-Q SEC reporting forms, and other financial statements will be “unduly burdensome and costly” for SEC listed firms. We will not adapt here Dr. Ackerman’s four principles to improve climate economics to improving SEC climate disclosures. But we do advise the SEC to review these principles, particularly to ensure that the future of our grandchildren is not discounted in regulatory abuse of cost-benefit analysis, in which valid analysis is only that which has short-term monetary expression.4
Investor demand for information from climate related and ESG disclosures has been called “the new normal.” According to the results of a survey by “Ernst & Young, 91% of institutional investors consider nonfinancial performance core to their investment decision making process over the past year .”5 The SEC must not succumb to political and issuer lobbying to limit climate and ESG disclosures only to those that have a material impact on a firm’s quarterly or annual financial statement. To adapt a balance sheet approach to disclosure will deprive investors, auditors, insurers and other interested parties of both quantitative and qualitative information about how SEC registrants (and eventually private equity and closely held firms) are changing their policies, production practices, human capital management, portfolio and capital allocations to meet the short, medium and long-term physical and transitional risks of climate change.
If the SEC allows its registrants to remain in the 20th century world of climate economic skepticism and to mollify investor demands for granular ESG and climate information with promises to become sustainable, U.S. investors may well choose to trade on platforms in jurisdictions with more comprehensive and comparable disclosure requirements. If investors cannot compare issuer disclosures, they may move their investments to jurisdictions that better protect investors by ensuring that they have access to comprehensive, comparable and reliable disclosure information. No matter how up-to-date financial trading technology is, trading algorithms will not prevent disruption of markets and capital formation by firms that are unprepared to adapt to climate and ESG related adversity on small and large scales over the short and long terms.
Finally, disclosure must be standardized, comparable, reliable and mandatory because a large share of SEC registrant climate commitments, just measured in GHG reduction commitments, are weak to non-existent. For example, according to Institutional Shareholder Services, “Just over a third of the 500 companies in the S&P 500 stock index have set ambitious targets, it found, while 215 had no target at all. The rest had weak targets.”6 The following comment and responses to SEC questions comprise a general comment and responses, plus responses that concern disclosure requirements that apply specifically to agribusiness and food processing companies.
IATP generally supports granular, standardized, comparable and mandatory disclosure of climate-related risks to the SEC. We believe that existing rules should be amended and amplified to accommodate climate and ESG disclosures, rather than creating a new and separate rule.7 We agree that “the current path of climate disclosure will not provide the transparency that an increasing number of investors are seeking and, indeed, a properly functioning market requires—consistency of disclosures across time, comparability of disclosures across companies, and reliability of the information that is disclosed.”8 Banks that finance SEC registered firms prefer a SEC standardized climate risk reporting, so they are not forced to choose among or synthesize their clients’ voluntary reporting standards when reporting the banks’ own climate physical and transition risks from consolidated audit trails.
The SEC should review the work of the voluntary climate financial and ESG standards initiatives to determine which elements of those standards might be incorporated into a proposed SEC disclosure rule.9 All disclosures to the SEC and in audited financial reports should be overseen by the reporting firm’s Chief Financial Officer, attested to by the CFO and audited independently. The oversight process, attestation and auditors report could be included in item 9a, “Controls and Procedures” of the 10-K report. To reiterate, we support standardized and mandatory disclosure requirements with five multi-part recommendations. We conclude this comment with a mini-case study of disclosure issues for the meatpacking and dairy processing industries.
First recommendation: Build SEC capacity to evaluate disclosures of long-term physical and transitional risks based on long-term climate modeling
The likelihood of and costs from climate change related weather events at the firm level can be estimated over a short term (e.g. 1-3 years) with the use of accounting and actuarial data.10 However, reporting estimated physical and transition risks over the longer term rely on climate modeling that is subject to variables and uncertainties that cannot be quantified with the degree of certainty that investors and other market actors demand. A group of climate modelers recently warned, “Calls for the integration of climate science into risk disclosure and decision-making across many levels of economic activity has leap-frogged the current capabilities of climate science and climate models by at least a decade.”11 This warning does not mean that the SEC should wait a decade for climate science and modeling to catch up to the demands of business for geo-spatially and temporally specific climate information for the SEC to initiate and finalize a rulemaking on climate disclosures. It does mean that the SEC needs in-house climate modeling expertise to evaluate whether the longer-term plans of a firm are adequate to mitigate its longer-term risks estimated by reporting entities according to their use of climate models.
For example, climate science has described the geo-physical “tipping points” that will result in abrupt or irreversible changes to global and regional climates.12 However, modeling how, when and to what extent those changes will impact corporate and financial sector assets and supply chains is subject to a number of climate scenarios, variables and uncertainties. The Commission should consider phasing in the reporting of longer-term physical and transitional risks to take into account the computer modeling capacity of reporting firms to estimate their firm level operational, credit, liability and market risks.13 The Commission could also develop criteria to enable issuers to report longer-term risks and projects to mitigate and adapt to climate change with differentiated confidence levels similar to those consensus scientific reports, such as those of the International Panel on Climate Change.
To continue reading IATP's recommendations and view the footnotes, please download a PDF of the comment letter.