It's Time to Prepare for Climate Disclosures

This blog was coauthored by Alma Angotti and Eleanor Gass.

The Securities Exchange Commission’s (SEC’s) request for public input on climate disclosures published on March 15 reinforced a shift occurring in the expectations of financial institutions managing environmental, social and governance (ESG) portfolios. With climate risks becoming more concerning, potential climate risks must be clear to investors and regulators when the covers are lifted.

European governing bodies have already instituted new disclosure requirements that are having ripple effects through global markets, and now the SEC is also taking charge. For some, this couldn’t have come at a better time, as the US’ approach to ESG investing has come under scrutiny in recent weeks for being far too lenient and incapable of eliciting meaningful change. 

Why Do Climate Disclosures Matter?

As ESG portfolios are used to mitigate the risk of climate change on financial markets and climate-related events worsen in economic impact, the role of disclosures is increasing as investors look for more clarity on the known risks. The 2010 climate disclosure guidance is not up to the task, and the SEC is making it clear that change will happen, as these enhancements are imperative to providing the industry with “consistent, comparable, and reliable information” regarding expectations. The SEC and many other industry participants believe that this reform on climate-related disclosures will set the US on a path to achieving its climate goals, making a meaningful impact on the environment by requiring greater accountability from the primary markets, which some claim has been lacking in recent years. In addition, tightened disclosure requirements will aid in achieving climate goals by requiring much needed transparency to adequately monitor and mitigate climate-related risks observed in financial markets. 

How Imminent Are the Changes?

Recent actions taken by the SEC are another indication of agencies prioritizing that the US financial system is capable of combating climate change. The wave of change is coming, and it is time for companies to begin preparing. If the European Union regulations are anything to go by, broad generalizations are out and quality, data-driven disclosures are in. The US financial markets are a major player in the country’s ability to achieve its climate goals, and improved disclosures are a critical step in achieving those goals.