A climate-related call to action (not enough calling, not enough action)

The Ceres Accelerator for Sustainable Capital Markets issued Addressing Climate as a Systemic Risk: A call to action for U.S. financial regulators

The Ceres Accelerator for Sustainable Capital Markets “aims to transform the practices and policies that govern capital markets in order to accelerate action on reducing the worst financial impacts of the global climate crisis and other sustainability threats.” The new report “offers more than 50 specific recommendations covering seven key federal financial regulatory agencies, along with state and federal insurance regulators. These recommendations outline the affirmative steps regulators should take to protect the financial system and economy from potential climate-related shocks that can flatten an economy and grind it to dust.” I’ll post the ones applying to the US Securities and Exchange Commission:

  • Analyze climate risk impacts on the securities markets and on the SEC mandate, and consider establishing a cross-divisional taskforce to allow for coordinated responses.
  • Make clear that consideration of material environmental, social and governance (ESG) risk factors, such as climate change, is consistent with investor fiduciary duty.
  • Issue rules mandating corporate climate risk disclosure, building on the framework established by the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD). In the short term, the SEC should enforce the existing regulations and interpretive guidance on climate risk.
  • Direct the Public Company Accounting Oversight Board (PCAOB), overseen by the SEC, to assess whether firm audits adequately detect climate risks, and issue guidance to help auditors better understand how climate risk affects audits and accounting. The PCAOB should also assess existing standards to identify when amendments and updates may be needed, and issue such amendments.
  • Encourage the Financial Accounting Standards Board to drive consistency in the way that climate risk is disclosed in financial statements.
  • Issue guidance encouraging credit raters to provide more disclosure on how climate risk factors are factored in ratings decisions. They could also examine the extent to which climate risk is considered by credit raters, and summarize findings in annual examination reports.

The New York Times reported that the Ceres initiative was backed up by letters “signed by more than three dozen pension plans, fund managers and other financial institutions that together manage almost $1 trillion in assets,” sent to the Chair of the Federal Reserve and others. The Times summed up a couple of possible looming consequences of doing nothing:

  • Investors worry that if regulators do not act, climate change may cause the price of some companies to fall suddenly, the effects of which may ricochet through the economy. Providing more information about that risk — for example, by requiring companies to disclose more about their greenhouse gas emissions, or which of their facilities are at risk from rising seas — could help investors make better decisions.
  • That, in turn, might encourage companies to lower their emissions, or risk losing access to investment or affordable insurance coverage. “Every medium and large business has bank loans and has insurance,” said Steven Rothstein, managing director of the Ceres Accelerator for Sustainable Capital Markets, a group that works with investors and which organized the letter.

You don’t need very deep memory banks to recall that this is just the latest in a long history of reports and letters and suchlike, all respectfully greeted and reported on, but so far with little more lasting legacy than expressions of grief at a funeral. I really don’t mean to be cynical or pessimistic, but how many such initiatives are we meant to applaud (I note that the copious use in the extracts above and elsewhere of terms like “explore,” “consider,” and “assess” reads as if we were still at square one)? While Ceres cites the threat to “everything from our financial markets, to our political security to our very existence on earth,” its primary focus is plainly on the former. But there’s a real question over whether preserving our financial markets in their current form is even generally compatible with our “very existence on earth.” We’ve noted here before how stock prices have become increasingly disconnected from the broad measurement of economic performance, let alone general well-being – but still, even the most exuberantly-priced stock eventually has to find some kind of real-world tethering. Being better equipped to (as summed up above) get out of individual stocks before they crash might be a fine ambition, but what if crafting a truly sustainable future demands that they all crash, because the mechanisms that have propelled them at historical levels of returns will have to be discarded?

I’ve advocated before that the IFRS Foundation should enter this area, but I’ve also expressed my opinion that standard-setting is now an inherently political act and should be acknowledged as such. The ongoing crisis hasn’t slowed down (and may have facilitated) the Trumpian project of rolling back environmental protections. The public conversation at the current time is so polluted and degraded that crafting a better disclosure window on terminal decline might indeed count as a relative achievement, yielding major financial pay-offs in some quarters. But such a project might ultimately (in the manner of executive compensation) be more of a corrupt sham than anything else. You know something, maybe having control over $1 trillion in assets should come with responsibility for more than generating another report…

The opinions expressed are solely those of the author

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