President Joe Biden plans to use all the tools at his disposal in the fight against climate change, including financial regulation. While not an intuitive choice, proponents argue that requiring SOEs and investment firms to quantify and disclose climate risks – and the costs associated with them – is a bold step that could make ESG (environmental, social and governance) data a common practice in companies’ financial reporting as sales and profit figures.
“The recent change of administration in Washington has contributed to a renewed sense of urgency around environmental issues,” said Leahruth Jemilo, head of ESG advisory practice at Corbin Advisors.
The Treasury Department has reportedly added 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 presented an idea of what a climate risk assessment framework might look like, saying banks and insurers could be subject to testing. climatic resistance.
While they would not limit companies’ ability to pay dividends or impose new capital requirements, Yellen said they could still be an effective tool for detecting and mitigating risk. She clarified that implementation and oversight would be the responsibility of the Federal Reserve and other banking regulators, not the Treasury, although she said the Treasury could “facilitate” the process.
Yellen also appeared to reject the idea that voluntary supervisory action by the financial services industry would suffice, saying, “It certainly requires policy.
The Securities and Exchange Commission has already created a new post of senior climate policy adviser, and the Federal Reserve joined the Network of Central Banks and Supervisors for Greening the Financial System, a consortium of more than 80 country.
Ben Koltun, director of research at consultancy Beacon Policy Advisors, said the announcements were a signal to investors, executives and policymakers. “This is a testament to the whole-of-government approach taken by the Biden administration to climate change,” he said.
Climate activists such as the environmental non-profit group Ceres want Gary Gensler, former chairman of the Commodity Futures Trading Commission, who is Biden’s candidate for head of the SEC, to force public companies to disclose their exposure to risk climate and the potential costs that could be incurred, in addition to documenting parameters such as greenhouse gas emissions, water consumption and plastic consumption.
Failure to do so could constitute securities fraud. It may sound drastic, but proponents of this expanded regulatory scope argue that climate change is a crisis of such monumental importance that using financial regulation as leverage to advance environmental policy is less extreme than it is. ‘it seems.
Proponents say climate change is a crisis of such monumental importance that the use of financial regulation as leverage to advance environmental policy is less extreme than it looks.
“I think it’s justified to some extent. Although climate change is a real risk and crisis, we still do not have a clear regulatory guidance to deal with what it means, what it means for businesses, ”Koltun said.
Some Republicans in Congress have warned that using a regulatory infrastructure aimed at banks and markets to achieve climate policy goals could produce unintended consequences, such as banning access to capital markets by investors. companies involved in the production of fossil fuels. “There is concern that there is no clear framework and that could lead to regulatory overshoot concerns,” Koltun said.
Centralizing the federal government’s approach to climate change could help alleviate those concerns, Koltun said. The alternative – multiple agencies working with different, sometimes overlapping, rules could overwhelm small businesses’ bandwidth for managing regulatory compliance and erode support from the business community. “The regulatory process is heavy enough already,” he said. “The advantage is that you have a hub to organize this… It creates a better workflow and creates a more transparent messaging process for voters and businesses.”
For regulatory agencies like the SEC, putting the broad outlines in place will only be the first step: developing detailed standards on how companies should define and quantify their exposure to climate change risks will be the task. the heaviest.
Even defining what a “green” or investment incorporates or implies will be a challenge. Some institutions that marketed funds as sustainable have faced investor backlash when investments in companies like fossil fuel producers – historically, this is not a sector that has been considered to have been made public. According to Jemilo de Corbin, 48% of institutional investors say their biggest challenge when it comes to ESG disclosure is the lack of a uniform standard for measuring and reporting this information.
“This renewed emphasis on [environmental disclosure] will only heighten the need for companies to decide on a framework or standard to use to measure and report ESG efforts, ”she said.
By defining climate change mitigation as a driver of job growth, rather than just environmental stewardship, Biden has garnered support from some unlikely allies. The US Chamber of Commerce endorsed Washington’s holistic approach to tackling climate change, saying in a statement: “The impacts of climate change are significant and it will take smart policies on a wide range of issues to achieve reductions. significant global emissions while supporting economic growth and job creation. “
“This policy is as much about employment and job creation as it is about clean energy,” Koltun said. “You want to form as big a coalition as possible… It’s the political tightrope that they have to walk – they want to focus on the climate crisis, but their concern is to build the economy.
Dan North, chief economist for North America at Euler Hermes, said companies realize that regulation to mitigate climate change is inevitable, and market professionals have largely counted these expenses as a cost. to do business. “We are going to have more regulation. This is where it happens, and every time there is more regulation, there is a cost to businesses, ”he said.
Some do not wait for regulators. Major companies such as Amazon, Microsoft, and Morgan Stanley have pledged to achieve carbon neutrality and set target dates for achieving zero emission status. Millennials, who make up a growing share of the workforce and are moving into leadership roles, are aware of the costs of continued climate inaction and of bringing these values to boardrooms and onto desks. negotiation. A growing number of retail investors are also voting with their dollars. Morningstar data shows sustainable fund balances are up 67% year over year and currently total nearly $ 1.7 trillion.
“Companies that incorporate meaningful ESGs into their business strategy are better positioned for long-term value creation,” said Jemilo. “Those who take ESG seriously – and not greenwashing – will be better able to target specific investors and open the door to additional capital.”
“It’s very popular with investors,” North said. “They’ve moved away from Milton Friedman’s model that return to investors is everything. ESG is also important. “