How investors are driving climate change risk disclosure
The Climate Risk Disclosure Act (CRDA) was introduced in September 2018 by current Democratic presidential hopeful Elizabeth Warren. The CRDA would empower the Securities and Exchange Commission to require public companies to disclose climate related risks to shareholders. These disclosures would include:
- Direct and indirect greenhouse gas emissions
- Total amount of fossil-fuel related assets
- Assessment of how market value could be affected by climate change
- Climate change related risk management strategies
While the act did not get through the recent congressional session, the act received wide ranging support, reflecting a growing trend for more transparency around climate change risk. The CRDA was a top-down approach, focused on legal requirements and enforcement provisions, but there are encouraging signs that investor-driven approaches may offer even more promise beyond federal requirements.
A case in point comes from New York State Comptroller Thomas P. DiNapoli, trustee for the New York State Common Retirement Fund (who supported the CRDA) which has over $200 billion in assets. DiNapoli, recognizing his responsibility to fully understand the Fund’s risks, required that the Fund assess public companies’ impact on climate change and the risks climate change poses to the Fund’s portfolio. From those efforts, NY’s pension fund has started a Sustainable Investment program, which has so far committed $4 billion to a new Low Emissions index and $6 billion to sustainable investments.
Companies are taking note of changing shareholder’s concerns. Nike recently announced its commitment to 100% renewable energy. Nike’s competition, Under Armour, at the request of the pension fund, agreed to provide a climate change adaptation plan that will include mitigation strategies and energy efficiency goals. Dollar General has responded to similar request from the pension fund. The fund also asked major greenhouse gas emitters including Delta Air Lines, Entergy, Berkshire Hathaway and Calpine to adopt greenhouse gas emissions reduction targets and assess climate change risk.
Since institutional investors like pension funds hold billions of dollars in assets, they are in a unique position to push climate risk disclosures from public companies. All investors, despite their size, should have access to information outlining companies’ climate change risks. As the push for access to climate risk increases from investors, companies should strive to gain investor confidence through increasing transparency of climate risks and plans, regardless of whether the law requires it.