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Is Financial Regulation The Way A Carbon Policy Would Be Advanced?
Failure to disclose climate risks and environmental costs could constitute securities fraud, if new proposals are passed.
In the battle against climate change, and financial control, President Joe Biden aims to use every weapon at his disposal. Supporters argue that mandating public corporations and investment firms to measure and disclose climate risks and the costs associated with them, while not an intuitive option, is a radical move that might make ESG (environmental, social and governance) data as ubiquitous as revenue and benefit estimates in corporate financial reporting.

“The recent change in administration in Washington has contributed to a renewed sense of urgency around environmental issues,” said Leahruth Jemilo, head of the ESG advisory practice at Corbin Advisors.

The Treasury Department is reportedly adding a “climate czar,” the Wall Street Journal reported earlier this month. At the New York Times DealBook virtual conference on Monday, Treasury Secretary Janet Yellen floated an idea of what a framework for evaluating climate risk might look like, saying that banks and insurers could be subject to climate stress tests.

Although they would not curb the willingness of businesses to carry out dividends or introduce additional capital conditions, Yellen said that they could also be an important mechanism for risk discovery and reduction. She explained that the Federal Reserve and other banking authorities, not the Treasury, would be responsible for enforcement and supervision, although she said the Treasury could “facilitate” the process.
Yellen also seemed to dismiss the idea that voluntary oversight measures on the part of the financial services industry would suffice, saying, “It certainly requires policy.”

A new, climate-focused senior policy advisor position has also been established by the Securities and Exchange Commission, and the Federal Reserve entered the Network of Central Banks and Financial System Greening Supervisors, a group of more than 80 countries, in December.
Ben Koltun, director of research at consulting firm Beacon Policy Advisors, said these announcements are a signal to investors, executives and policymakers. “It does speak to the whole-government approach the Biden administration is taking with climate change,” he said.

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In addition to tracking indicators such as greenhouse gas pollution, water usage and plastic use, climate campaigners such as the environmental non-profit organization Ceres want Gary Gensler, the former chair of the Commodity Futures Trading Commission, who is Biden’s candidate to head the SEC, to require public corporations to report their vulnerability to climate threats and the possible costs that may be incurred.

Failure to do so may constitute fraud on securities. It may sound dramatic, but supporters of this increased regulatory reach argue that climate change is a crisis of such colossal magnitude that it is less draconian than it sounds to use financial legislation as a lever to promote environmental policy.
Advocates say climate change is a crisis of such monumental significance that using financial regulations as a lever to advance environmental policy is less extreme than it sounds.
“I think it is justified to some extent. While climate change is a real risk and crisis, we still don’t have a clear regulatory guideline to handle what that means, what that entails for corporations,” Koltun said.

Some Congressional Republicans have warned that using a regulatory infrastructure intended for banking and markets to accomplish climate policy goals could produce unintended consequences, such as inhibiting access to capital markets by companies involved in fossil fuel production. “There’s a concern that there isn’t a clear framework and it could lead to concerns of regulatory overreach,” Koltun said.

Centralizing the federal government’s approach to climate change could help mitigate those concerns, Koltun said. The alternative — multiple agencies working with different, sometimes overlapping rules — could overwhelm smaller companies’ bandwidth for regulatory compliance management and erode support from the business community. “The regulatory process is already pretty cumbersome,” he said. “The benefit is you have a hub for organizing this… It creates a better workflow and it creates a more seamless messaging process to voters and companies.”
For regulatory agencies like the SEC, getting the broad contours in place will be only the first step: Crafting detailed standards for how companies must define and quantify their exposure to risks related to climate change will be the heavy lift.

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Even defining what a “green” or investment incorporates or entails will be a challenge. Some institutions that have marketed funds as sustainable have faced investor blowback when investments in companies like fossil fuel producers — historically not a sector that has been viewed were publicized. According to Jemilo at Corbin, 48 percent of institutional investors say their biggest challenge regarding ESG disclosures is the lack of a uniform standard for measuring and reporting that information.

“This renewed emphasis on [environmental disclosure] will only further drive home the need for companies to decide on a framework or standard to use in measuring and reporting on ESG efforts,” she said.

By framing climate change mitigation as a driver of job growth, rather than just environmental stewardship, Biden has built support for this push from some unlikely allies. The U.S. Chamber of Commerce has endorsed Washington’s holistic approach to fighting climate change, saying in a statement: “The impacts of climate change are far reaching and it will take smart policies across a wide spectrum of issues to achieve meaningful global emissions reductions while also supporting economic growth and job creation.”

“This policy is as much about jobs and job creation as it is about clean energy,” Koltun said. “You want to get as big a coalition as possible… That’s the political tightrope they have to walk — they want to focus on the climate crisis, but their concern is building the economy.”

Dan North, chief economist for North America at Euler Hermes, said companies are coming around to the realization that regulation to mitigate climate change is inevitable, and market pros have largely priced in these expenses as a cost of doing business. “We’re going to be having more regulation. That’s where this is going, and anytime there’s more regulation, there’s a cost to businesses,” he said.

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Any of them don’t wait for regulators. Significant companies such as Amazon, Microsoft and Morgan Stanley have agreed to carbon neutrality and set target deadlines for zero-emission status achievement. Millennials, who make up a rising proportion of the population and are moving into leadership positions, are mindful of the costs of continuing climate indifference and are taking those ideals to boardrooms and trade desks. A rising number of institutional investors still use their dollars to vote. Morningstar data reveals that year-over-year sustainable fund balances are up 67 percent, and now equal almost $1.7 trillion.

“Companies that incorporate meaningful ESG into their business strategy are better positioned for long-term value creation,” Jemilo said. “Those that are taking ESG seriously — not greenwashing — will be better able to target specific investors and open doors to additional capital.”

“It’s very popular with investors,” North said. “They’ve gone away from the Milton Friedman model that return to investors is everything. ESG is important, as well.”

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