With just months left in office, the Obama administration appear set to get done by executive action everything it couldn’t get Congress to do over the past eight years. Based on a startling new op-ed from a pair of White House officials, that even includes using the power of the Securities Exchange Commission to shame public companies into divesting from any involvement in fossil fuels.
Writing in the Wall Street Journal, Senior Adviser Brian Deese and National Economic Council Director Jeff Zients call for “clear, uniformly disclosed assessments of climate-related economic risks.” That much seems reasonable enough. There are obvious risks from climate change that public companies would need to take into account and to disclose to investors.
For example, a power company that owns significant amounts of coal-fired generation plants must consider whether those assets, through a combination of regulations and competition from emerging alternative energy sources, will have to be written down. A real-estate investment trust heavily invested in coastal properties needs to weigh whether those structures will be permanently underwater in the not distant future. Shifting weather patterns may have impacts that affect any number of operational and supply-chain processes.
But what’s important to bear in mind is that such things are already covered under existing disclosure requirements for “material risks.” Under a 40-year-old Supreme Court decision authored by Justice Thurgood Marshall, public companies must consider a fact material “if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote.” The SEC last formalized this standard in a 1999 accounting bulletin that declares material risks to be “those matters to which there is a substantial likelihood that a reasonable investor would attach importance in determining whether to purchase the security registered.”
The White House acknowledges that the SEC already mandates disclosure of all “financially material” risks, but suggests this does not go far enough. In their op-ed, Deese and Zients propose the SEC “adopt detailed and standardized industry specific requirements for disclosure, and, once in place, aggressively hold public companies to account when it comes to those obligations to disclose.”
In short, what they imagine is requiring companies fill out reams of paperwork answering questions that have nothing at all to do with “risk,” as such. Those of us who follow the insurance industry already have seen a preview of what such surveys might look like. Proposed changes to the National Association of Insurance Commissioners’ Climate Risk Disclosure Survey floated by California Insurance Commissioner Dave Jones would, for instance, ask whether “the company has taken to engage key constituencies on the topic of climate change,” making implicit company’s duty to lobby lawmakers on environmental issues.
Jones has more recently led a campaign to get all insurers doing business in the nation’s largest state to divest from coal-related stocks and bonds, including utilities, even though these represent only a tiny portion of insurers’ overall investments. Meanwhile, California Gov. Jerry Brown last year signed legislation forcing the California Public Employees’ Retirement System (CalPERS) and the California State Teachers’ Retirement System (CalSTRS) to divest from coal investments. Predictably, being forced to dump the investments has caused the pension funds to lose money.
Then we have the case of New York City Comptroller Scott Stringer, an elected official who also happens to serve as administrator of the city’s $160 billion public employees’ pension funds. Stringer appears to be exactly whom Deese and Zients have in mind when they note their campaign has the support of “large institutional investors representing trillions of dollars in capital.” Stringer has in recent years used his funds’ leverage to push for proxy access – that is, the ability to run alternative slates of directors – at dozens of oil, gas, coal and utility firms. The campaign has gotten him lots of attention from pro-divestment activists, but it’s not at all clear how it serves the interests of the retirees whose pensions he has a fiduciary duty to protect.
To be clear, climate change is a real problem that poses real risks. Regulators already have the tools to require that public companies disclose those risks to investors. But market actors do not need additional government prodding to take such risks into account – all of the incentives are already on the table.
What the divestment and “disclosure” movements are about has much less to do with genuine risk assessment and much more to do with using the power of the state to shame, cajole and punish politically disfavored industries.