Exclusive: Companies face a financial risk from the climate crisis. States want them to reveal just how much

Corporate America must be compelled to fess up about the financial risks posed by the climate crisis, a coalition of state attorneys general told the Securities and Exchange Commission on Monday.

In a comment letter obtained exclusively by CNN Business, California and nearly a dozen other states warn that the SEC’s current disclosure rules are inadequate given the gravity of the climate crisis and the transparency investors crave.

“Climate change is not a distant problem to be dealt with in the future,” the letter to the SEC reads. “It is here, and it threatens the US economy and its financial system.”

31 May 2021, Berlin: Cars, trucks and delivery vehicles drive into the city on Kaiserdamm in the capital. An ECJ ruling on the exceeding of the limit values for nitrogen dioxide is expected. The EU Commission has sued Germany for exceeding the annual and hourly limits for nitrogen dioxide in numerous areas since 2010. Germany is thus systematically violating the EU air quality directive and has done too little to keep this violation to a minimum.

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The letter, signed by the Democratic attorneys general of Connecticut, Delaware, Illinois, Maryland, Massachusetts, Michigan, Minnesota, New York, Oregon, Vermont, Maryland and Wisconsin, calls for “comparable, specific and mandatory” climate-related disclosures by SEC-regulated firms.

Specifically, the states urged the SEC to require companies to make annual disclosures of their emissions and any plans to address them; analyze and disclose the potential impacts of both climate change and climate regulation; and disclose policies on corporate governance and risk management related to climate change.

The pressure from states comes ahead of Tuesday’s deadline set by the SEC for the public to weigh in on the agency’s climate change disclosure rules.

The SEC has already received more than 5,000 comments in response to its mid-March request for public input. The agency has also held more than two dozen meetings with companies and business groups, including with the representatives of Apple (AAPL), JPMorgan Chase (JPM), Uber (UBER), Walmart (WMT), Royal Dutch Shell (RDSA), ConocoPhillips (COP), the US Chamber of Commerce and Business Roundtable.

The costs of the climate crisis

In its 22-page comment letter, the California-led coalition argues that mandatory climate disclosures are “essential” not only to the SEC’s mandate to protect investors but also to “ensure efficient capital formation and allocation.”

“Given the demand from investors for such disclosures, the significance of climate change risk to companies, and the importance of efficient capital allocation to climate-resilient companies, such disclosures are squarely in the public interest,” the letter reads.

The states note that many US companies do not make climate-related disclosures and have no plans to do so in the future. Others issue “boilerplate” disclosures that “suggest that they are not thoroughly evaluating or disclosure their exposure,” the letter said.

States say they have a vested interest here because climate change is causing extreme weather events that damage local communities and sap public resources. California in particular has been rocked by deadly wildfires that could worsen as the climate crisis deepens. Rising sea levels threaten coastal communities and risk severe flooding.

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At the same time, climate change and the transition to clean energy poses legal, business and physical risks to companies — including ones that states and their residents invest in directly or through retirement accounts and pension programs.

The comment letter points out that climate-related weather events have imposed more than $600 billion in direct economic damages on US companies since 2016, according to estimates by the National Oceanic and Atmospheric Administration.

“As the state prepares for the twin crises of drought and wildfires, Californians have a right to know what exposure their investments — including college savings, pensions and retirement accounts — have to climate change,” California Attorney General Rob Bonta said in a statement.

Debating the role of the SEC

However, some business groups and Republicans are urging the SEC not to overstep its authority by imposing burdensome climate regulation.

All Republican members of the US Senate Banking Committee wrote a letter to the SEC on Sunday stating that new regulations to specifically address global warming are not necessary or appropriate.

“The SEC is an independent financial regulator, whose political insulation reflects its narrow focus on the financial markets,” the GOP letter said. “It does not have a mission of remaking society or our economy as a whole.”

And they argued the push for more disclosure is being driven by efforts to appease asset managers and other third-party stakeholders.

“Activists with no fiduciary duty to the company or its shareholders are trying to impose their progressive political views on publicly traded companies, and the country at large,” the letter reads

Last month, the US Chamber of Commerce opposed a bill that would require the SEC to establish climate-related risk disclosure metrics and public companies to disclose the financial and business risks they face from climate change.

Investors want more transparency

The SEC last guided companies on how to disclose climate change issues in 2010, when the agency issued guidance indicating information about climate risks and opportunities might be required to be disclosed.

“Since 2010, investor demand for, and company disclosure of information about, climate change impacts and opportunities has grown dramatically,” the SEC said in its March request for information.

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Indeed, activist investors recently won three board seats at Exxon (XOM)Mobil following a bruising battle with the oil giant. The proxy fight between Exxon (XOM) and hedge fund Engine No. 1 was the first at a major US company where the case for change was built around the transition away from fossil fuels.

Last week, more than 450 major investors managing over $41 trillion called on world leaders to implement mandatory climate risk disclosure requirements and take other steps to more forcefully confront the climate threat.

“Climate risks could damage and destabilize the United States economy — and with it, the value of investor holdings,” the California-led coalition argued Monday, “if companies, regulators and investors cannot effectively manage them.”