Congressional Testimony: Climate Disclosure Is Financial Disclosure

By Steven Rothstein, Managing Director, Ceres Accelerator for Sustainable Capital Markets

In 2003, Ceres and a handful of investors met with the Securities and Exchange Commission (SEC) for the first time to discuss the importance of mandatory climate disclosure to give investors the information they need to adequately manage their risks.

Fast forward to last year, and the number of investors mobilized by Ceres and our partners calling for standardized disclosure in the U.S. has grown to well over 730. As climate financial risk has become more apparent as a result of unprecedented weather emergencies, like the deadly 1,000 year flood that swept through Kentucky and the massive fires in California, along with anticipated costs of transitioning to a low carbon economy, one reality has become clear: you can’t manage what you can’t measure.

This spring, the SEC released its rule proposal that would require public companies to disclose their climate-related risks and opportunities. The proposal responds directly to these calls from investors for consistent, comparable, decision-useful information on climate risk.

I recently had the opportunity to testify in Washington, D.C., on the topic of the SEC’s recent climate disclosure proposal at a meeting before the United States Senate Climate Change Task Force. The meeting was held to address the importance of the SEC’s proposal and highlight the key issues at stake.

In my testimony, I outline the overwhelming support from investors for the rule, discuss how it matches up with the frameworks of our global peers, and reaffirm that this proposal sits squarely within the SEC’s authority and mission to protect investors. Watch or read my testimony below.

Watch the Senate Climate Change Task Force Meeting on SEC Disclosures

Testimony before United States Senate Climate Change Task Force by Steven M. Rothstein, Managing Director, Ceres Accelerator for Sustainable Capital Markets

Tuesday, August 2, 2022, 12:00 p.m.

Senator Markey and distinguished members of this Task Force, my name is Steven Rothstein, Managing Director of Ceres Accelerator for Sustainable Capital Markets. Thank you for the kind invitation to appear today before the Senate Climate Change Task Force.

Ceres is a non-profit organization started over 30 years ago. The Ceres Investor Network includes more than 220 institutional investors, managing more than $60 trillion in assets. These investors are keenly interested in improved disclosure about climate-related financial risks so that they can assess those risks when making investment and voting decisions. Our global collaborations with investors include Climate Action 100+, The Investor Agenda, the Paris Aligned Investment Initiative, and the Net Zero Asset Managers initiative.

I would like to briefly provide insights into these questions, and any other questions the Task Force has:

• Is this something investors care about?
• Does the SEC have the authority to address these issues?
• How does this fit into the international context of climate disclosure?

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Is this something investors care about?

Investors have been overwhelmingly calling for this. Here are but a few examples highlighting the investor perspectives:

• Investors take their fiduciary duty seriously. That’s why they need to understand all risk to companies in their portfolios, including climate risk, to protect the investments of their clients & their beneficiaries. Investors are focused on maximizing returns and minimizing risks for shareholders. Full stop.
• In 2003, Ceres and investors met with the SEC to request additional climate disclosures to manage their financial risk.
• Investors and Ceres strongly supported the SEC’s 2010 “Guidance Regarding Disclosure Related to Climate Change”. This guidance has been in place for 12 years.
• Investors want consistent, comparable, and decision-useful disclosures. There are current inefficiencies in the sharing of information in the market because there are many different measurement tools used, and a pressing financial risk that needs standardized information across all companies in a portfolio.
• Nearly 800 companies and 733 investors representing $52 trillion in assets under management, have called on governments to implement mandatory climate disclosures.
• Investors today are not receiving accurate and complete information about the financial risk from climate changes. This is a critical role of the SEC to ensure this exists for investment and voting decisions.
• Investors continue to commit to net zero targets, as reflected by the Net Zero Asset Managers initiative’s growth to 273 asset managers representing over $61.3 trillion in assets under management as of May 2022. This indicates they are not simply asking for others, but they are taking important steps themselves.
• We have been reviewing comments submitted last month from investors. We have submitted initial information about investor responses to the proposed SEC proposal.

Support for this is not limited to investors. As the material that has been submitted highlights, many large companies, while not agreeing with all the proposed SEC elements, are on record as supporting mandatory climate disclosure and recognize investor needs for comparable, consistent, and complete information.

In a poll conducted this year, 87% of people, including 74% of Republicans, indicated their support for mandatory corporate disclosure for larger companies

Does the SEC have the authority to address these issues?

The SEC’s statutory mission is to “protect investors; maintain fair, orderly, and efficient markets; and facilitate capital formation.”

Due to the growing climate-related risks built into the financial markets, this will only be possible through mandatory disclosure.

This has been affirmed by many recent submissions to the SEC. For example, there is a bipartisan Working Group is comprised of fifteen former senior SEC officials, including four SEC Chairs, five SEC Commissioners, five SEC General Counsels, and four Directors of the SEC’s Division of Corporation Finance; and many other distinguished legal scholars. Their thoughtful submission stated in part, “we write to express our unanimous view the SEC has clear statutory authority to mandate additional climate-related disclosures for publicly traded companies.” In fact, their letter outlines that “the SEC has mandated environmental disclosure at least as far back as the Nixon Administration.”1

There is another letter of 30 securities legal scholars that says in part, 2

“The statutory framework requires the SEC to adjust and update the content of the federal securities disclosure regime in response to the evolution of the economy and markets, and, in recent decades, the SEC has done so to require disclosures on a variety of subjects from Y2Kreadiness to cybersecurity, to human capital management, to the effects of the Covid-19 pandemic. Rules mandating climate-related disclosure fit with this pattern of iterative modernization. Such rules do not represent a foray into new and uncharted territory, since the SEC has a long history of requiring disclosure on environmental and climate-related topics dating back more than 50 years.”

How does this fit into the international context of climate disclosure?

We appreciate the leadership of the SEC responding to the requests from investors and other market participants. But even if the entire proposed rule was adopted, the U.S. would still be behind many other nations. In fact, regulators in Belgium, Canada, Chile, France, Japan, New Zealand, Sweden, and the United Kingdom have mandated TCFD-aligned climate-related financial disclosures. The international standard setter, the International Financial Reporting Standards (IFRS) and their work to establish proposed rules for 140 nations.

In short, if the SEC does not act, many U.S. public companies that operate internationally will be required to file climate disclosure information that has been set by other nations.

Business leaders and investors cannot manage what they cannot measure.

The proposed SEC rule is a financial disclosure rule. It does not impose actions on companies to reduce emissions. It simply ensures that investors and other stakeholders will have enough information so they can act to protect people’s pensions, to promote our nation’s economic growth, to ensure the US companies are competitive internationally, to provide the information that employees and other stakeholders are seeking. Your hearing today is a vital step in this process and your thoughtful leadership is valued. Thank you again for this opportunity.