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Nicklaus: Investors want better climate disclosure, and the SEC may oblige

Nicklaus: Investors want better climate disclosure, and the SEC may oblige

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Big investors are demanding more information about companies’ exposure to climate change, and the nation’s top securities cop seems inclined to give it to them.

Securities and Exchange Commission Chairman Gary Gensler has asked the agency’s staff to develop a proposal on climate-change disclosure by the end of this year. In comments submitted to the SEC, many big investors say they need the information.

“BlackRock believes climate risk is investment risk,” the world’s largest asset manager says in its comment letter. Vanguard’s letter says that gathering climate-related data now is an “ad hoc and cumbersome process.”

When a small hedge fund won 3 seats on Exxon Mobil's board, it highlighted Wall Street's growing emphasis on environmental issues. Jim Gallagher and David Nicklaus explain what this shift means for the future of capitalism. Video by Colter Peterson, cpeterson@post-dispatch.com

Sustainable or “green” funds represent a growing part of the investment market, but they aren’t the only investors who would welcome a standardized, SEC-mandated set of disclosures.

“It’s a good idea as long as it’s not overly onerous or overly costly,” Richard Ryffel, director of wealth management at Clayton-based First Bank, told me. “Disclosure with respect to climate change can help an investor understand if there are any latent risks.”

Ken Crawford, senior portfolio manager at Argent Capital Management, would like to see both quantitative data on greenhouse gas emissions and qualitative discussion of how global warming affects a company’s business.

“If we know how much they are polluting, we can track it,” Crawford said. “That trend analysis would be helpful in understanding both their costs and their competitive position.”

Any move to require climate disclosure will face Republican opposition. Missouri Attorney General Eric Schmitt, for instance, argues in a comment letter that such an initiative “exceeds the SEC’s authority and threatens to politicize corporate disclosures.”

Schmitt and other opponents say the agency should stick to its current standard, which requires disclosure only of facts that are material to a company’s financial results.

John Coffee, a securities law professor at Columbia University, doesn’t buy that argument. He said the SEC can and should go beyond the materiality standard when there’s non-financial information that will benefit shareholders.

“This is the kind of information the investors who own the stock want to know about, and it is not something that falls within classic materiality,” Coffee said.

The SEC will face a lot of thorny questions in writing a disclosure rule. Do companies need to disclose only their direct carbon emissions, or should they include carbon produced by the electricity they use and by their suppliers?

And rules may need to vary by industry. An airline, a bank and an oil company are all affected by climate change, but the risks they face are quite different.

Coffee agrees that disclosures should differ by industry, but he doesn’t think the SEC should leave it up to companies to decide what to divulge. “I will agree that there’s a difference between Exxon and a bank, but the idea that you would delegate the choice of appropriate data to each industry is an abandonment of your mission,” he said.

Dan Elfenbein, professor of organization and strategy at Washington University’s Olin Business School, thinks the SEC is asking important questions about the need for climate-risk disclosure, and he’s hopeful that the exercise won’t be burdensome.

“I think companies are further along at this than we probably give them credit for,” he said. “My guess is that the cost of this for the big companies is not going to be that big a deal, because they’re already doing it.”

They are doing it, but each company is choosing its own metrics. By bringing order to the chaos, the SEC can do investors a big favor.

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