As you know, there has been a fairly sustained clamor for the SEC to impose a requirement for climate change and sustainability disclosure. For example, in May, the SEC’s Investor Advisory Committee recommended that the SEC “set the framework” for issuers to report on material environmental, social and governance information, concluding that “the time has come for the SEC to address this issue.” (See this PubCo post.) However, SEC Chair Jay Clayton and others at the SEC have been fairly vocal about their reluctance to impose a prescriptive sustainability disclosure requirement beyond principles-based materiality. But what about a narrower request? A mandate for just a single piece of information? This rulemaking petition filed by Impax Asset Management LLC, investment adviser to Pax World Funds, a “specialist asset manager investing in the transition to a more sustainable economy,” requests that the SEC “require that companies identify the specific locations of their significant assets, so that investors, analysts and financial markets can do a better job assessing the physical risks companies face related to climate change.”
The petition points out that research shows that
“severe precipitation, floods, fires, droughts, sea level rise, extreme heat, and the spread of tropical diseases and pests to temperate zones are often not random and or impossible to anticipate, but are linked to a warming climate. These changes pose risks not only to companies, but their investors, financial markets and the global economy. Climate change poses several types of risk. Transition risks—regulatory risk, the risk of litigation, reputational risks, and possible losses of competitiveness as the world moves closer to a low-carbon economy—often fall most heavily on the largest emitters. Physical risks, however, can happen to any enterprise, and depend not on emissions but on where the company operates, and where the major facilities are in its value chain. This is why investors need more precise physical location data from companies than most now provide.”
The petition then highlights the findings of several scientific studies and papers that identify various levels of value at risk as a result of climate change—from a permanent loss of 5% of GDP to 20% or more, a reduction in global incomes by approximately 23% by 2100 and, just in the United States, a reduction in economic growth by up to one-third over the next century. While these estimates cover decades, the impact, the petition contends, is already being experienced. One source reported that 215 of the largest companies forecast $1 trillion in value at risk from climate change within the next five years. Standard & Poors has estimated that 60% of the S&P 500 (market cap of $18 trillion) hold physical assets that are at high risk of at least one type of climate-change physical risk.
The petition points out that the TCFD (Taskforce on Climate-related Financial Disclosure), has recommended that scenario analyses be performed to better understand the risks to companies’ assets. But, the petition contends, without adequate disclosure of the location of key assets, scenario analyses are difficult to perform. For example, the petition observes, “a major manufacturing facility in a flat coastal location is far more vulnerable to both coastal cyclones and sea level rise than the same facility sited hundreds of feet above sea level.” However, companies are not sufficiently precise in their reporting to enable investors to identify geographic locations of major facilities within states or countries, which is necessary to detect vulnerabilities and changing probabilities of future events, such as hurricanes, droughts and fires, in those locations. This information is not required by Reg S-K or by the 2010 staff guidance on climate change disclosure. The petition requests the SEC to
“require companies to list specific locations—at least street addresses, and preferably longitude and latitude—of all facilities whose loss or impairment would materially affect financial results. This information, which companies already hold and would not require significant new data gathering and compilation costs, would be very helpful to investors in assessing and pricing physical climate risks appropriately. Without this information, investors will be vulnerable to an increasingly frequent and severe set of shocks that might be mitigated or avoided with increased disclosure.”