For decades, economists have been trying to understand how climate change will disrupt the global economy. Last year, the Swiss Re Institute warned that climate change could wipe up to 18 percent of GDP off of the worldwide economy by 2050 if global temperatures rise by 3.2° Celsius. The impact of climate change for investors on their future portfolios is nothing to balk at, which might be why the latest proposal from the U.S. Securities and Exchange Commission is causing a buzz.
The SEC announced a new proposal last Monday that would require any company that seeks to raise capital from U.S. investors to release a set of climate-related financial disclosures. As detailed in a press release, the proposed rule changes would require companies to include information about climate-related risks (such as greenhouse gas emissions) that could feasibly impact their business, results of operations, or financial standing in their registration statements and quarterly reports. Businesses would also be required to disclose certain climate-related metrics along with their financial statements.
Forcing businesses to explain their own greenhouse gas emissions, their climate-related goals, and how climate risks influence their businesses is certainly a burden on companies. The question is will it change the way the investment community thinks about a companies’ financial outlook? Well, if climate change is, as SEC Chairman Gary Gensler puts it, “material information for investors to make informed decisions,” the answer is yes.
The proposed changes aren’t appearing from out of the blue. Last July, Gensler had given a speech calling for consistent climate disclosures for publicly-traded companies. “Today, investors increasingly want to understand the climate risks of the companies whose stock they own or might buy,” he said. Both then and now, Gensler maintained that hundreds of billions of dollars of investor capital are at stake, from large and small investors alike, and the lack of consistent criteria in which these investors can look to as they weigh whether to buy, sell, or vote one way or the other unfairly impedes their decision-making capabilities.
In an interview with CNBC, Gensler argued that if investors inherently make investment decisions based on future economics, then the risk of climate change is already being taken into consideration for the future price of assets. “What is the price of a stock? It’s the price today about the future performance of a company,” Gensler said in the interview. By his logic, if climate change is expected to have a negative impact on a company’s future earnings, investors would have an incentive to understand as much as possible about the risk before making a trade, and that’s where the additional reporting comes into play.
When it comes to risk disclosure, “green” and “sustainable” aren’t just buzzwords. If investors are already factoring in the impact that climate change will have on the value of their investments, then “green” and “sustainable” have a powerful connotation. The SEC’s proposal would effectively undercut false sustainability claims, known as ‘greenwashing.’ Without objective figures to fact-check these statements, there’s an argument to be had that asset managers can’t guarantee that they’re satisfying the goals of their investors who often have sustainability mandates themselves.
Climate disclosures aren’t a new concept. Corporate giants like Amazon, Apple, Google, and Microsoft (which incidentally posted support for the SEC proposal on their company blog), have already published their own climate data and outlined net-zero carbon emission goals by 2050 at the latest. Property companies like Prologis, an international real estate investment trust, and Lendlease, a multinational construction, property, and infrastructure company have already set climate disclosures in their financing plans. “We were doing sustainable development before there was investor pressure,” Sara Neff, head of sustainability for Lendlease’s Americas region, told The New York Times. Many property companies are already well aware that investors are opening their wallets for more sustainable real estate. However, each company, no matter the sector they’re in, that publishes their climate data abides by their own benchmarks for how much they admit in their disclosures, so the proposed rule would establish a consistent apples-to-apples framework for all publicly traded corporations.
That uniformity comes at the cost of some dense paperwork though, the proposal alone stretches past 500 pages. Granted, 2022 seems to be the year for mountains of financial disclosures in the name of administrative transparency, so any objectors who claim that the proposed guidelines would make for a logistical nightmare (like former SEC Chair Jay Clayton) may have less room to complain than they might think.
Outside of the increased workload, the SEC’s proposal will have some important implications for the real estate industry. It will further increase the value of energy efficient, carbon neutral buildings. It will also speed the investment to improve less efficient buildings. One unknown consequence is how it will take into consideration the environmental costs of construction which would incentivize group up redevelopment despite the considerable carbon footprint necessary to build new buildings rather than use the ones already built.
While considerable, the proposal is still in its draft stage. Businesses, investors, and other market participants can now comment on and suggest modifications to refine the proposed rules during a 60-day public comment period, which is good news since Gensler expects that the new rules will elicit a barrage of replies from investors and lawmakers as they digest the proposed changes. After the 60 days are up, the SEC can respond to comments, ask for further modifications, or put forth their final rules which can be voted on and adopted.
SEC’s proposal doesn’t explicitly outline any penalties for companies who choose not to comply with the guidelines. In all 510 pages of the full proposal, there’s no mention of a fine or an inspector with a badge and a clipboard who will come knocking on your door to conduct an audit. What the SEC has actually done with this proposal is shift power to investors who would, so to speak, penalize companies with their lack of monetary interest or by putting a premium on the capital they offer for companies that aren’t as green as they could be.
While tamping down carbon emissions is at the forefront of the discussion for SEC’s new climate disclosures, it’s clear that these disclosures are less about how companies are ramping up net-zero emissions and more so about what investors choose to do with the information that they publish.