Mandating Disclosure of Climate-Related Financial Risk

Abstract

Climate change presents grave risk across the U.S. economy, including to corporations, their investors, the markets in which they operate, and the American public at large. Unlike other financial risks, however, climate risk is not routinely disclosed to the public. Insufficient corporate disclosures have persisted despite the Securities and Exchange Commission’s (“SEC”) issuance of regulatory guidance on the topic, the emergence of voluntary disclosure frameworks and standards, and growing calls from major investors for improved disclosure.

Given the inadequacy of the current regime, the SEC should take further action to fulfill its statutory mandate to protect investors and promote efficiency, competition, and capital formation. Specifically, the Commission should issue new, mandatory disclosure regulations that will yield comparable, specific, and decision-useful climate risk information.

This article makes process-oriented recommendations relevant to the development of mandatory climate risk disclosure rules. The Commission should draw on existing frameworks and standards in crafting new regulations. The SEC should solicit input from financial and climate experts, investors, and voluntary reporting organizations by issuing concept releases and/or creating a climate risk advisory committee. The Commission should also draw on climate-related expertise at other federal agencies through interagency working groups. Finally, the SEC should increase its own expertise in this area by conducting economic research on climate risk through its Division of Economic and Risk Analysis. Taken together, these actions will facilitate informed investing, sustainable growth, and a more resilient economy.

Keywords: climate risk, climate disclosure, SEC, climate change