Investing in the Future: How Climate Risk Disclosure Can Drive Sustainable Climate Solutions

We know that climate change will affect our environment, but what about our financial security and ability to retire? Climate change poses economic risks, but businesses and pension funds can plan ahead and protect their investments and our futures from climate breakdown. 

In early July, a group of United States congresspeople introduced the Climate Risk Disclosure Act to the Senate and the House of Representatives. The bill proposes requiring every publicly traded company to disclose their climate-related financial risks so that their investors can better predict the financial stability of their investments.

So what are climate-related financial risks?

Climate-related financial risk is an umbrella term referring to the ways in which climate change will affect a company’s performance. Extreme weather, flooding, and wildfires threaten many companies’ physical operations, assets, and supply chains. But environmental conditions aren’t the only thing investors should be considering. The transition to a low-carbon economy and our efforts to mitigate climate change will have dramatic effects on how the economy operates. Companies heavily invested in fossil fuels and carbon-intensive industries will suffer as we leave those technologies behind, and reporting those risks allows investors to fully assess the security of their investments.

The Climate Risk Disclosure Act would require each company to disclose their direct and indirect greenhouse gas emissions and to report the cost of future emissions reduction requirements, fossil fuel devaluation, and even potential lawsuits holding big polluters accountable for their contributions to the climate crisis.

Why do we need a bill like this?

Under the current system in the US, companies report material risks to the Securities Exchange Commission (SEC) each year. These risks include anything that will affect a business’s value and performance, but there’s no consistent standard for what material risk means in the context of climate change. So even when climate-related risk is reported, it’s not standardized or comparable. The bill has companies report their climate risk through a standardized system and asks them their plans for managing those risks in the future.

Comprehensive information about how climate change will affect our economy allows investors to make informed decisions about their long-term investments. This is especially important for large institutional investors like pension funds, which have to think about the stability of their investments 50 years or more down the line.

If implemented, this bill would also incentivize a quicker transition toward sustainability, without putting the burden on tax payers, by driving divestment from fossil fuels and investment in clean-energy technology.

How Climate Risk Affects Pension Funds

Reporting the risk associated with climate change is not a new or radical idea. In 2017, the Financial Stability Board’s Task Force on Climate-related Financial Disclosures, part of an international body monitoring the global financial system, released a set of recommendations concerning climate-related financial risk disclosures. And other domestic and international organizations have considered such disclosure as well. In the United States, the proposed Climate Risk Disclosure Act follows on the heels of various state-level efforts to require pension funds to report on climate-related financial risks. The federal bill would make it much easier for these pension funds to fully analyze the climate risks of their investments.

CIEL’s Trillion Dollar Transformation report shows that pension funds already have a legal duty to consider how climate change affects their investments. Pension fund managers are legally obligated to act with care and caution in the best interest of their beneficiaries. Complacency in the face of climate change poses a direct challenge to their duty to safeguard the value of their funds.

And this risk is personal. If pension funds fail to account for the impact of climate change on their investments, it could affect millions of people’s abilities to retire and live comfortably after they stop working.

On a state level, climate risk disclosure legislation for pension funds already exists. In 2018, California became the first state to put it into law, requiring the California Public Employees’ Retirement System (CalPERS) and the California State Teachers’ Retirement System (CalSTRS) to assess climate risk in their investments.

The first reports under the new California law are due in 2020. Earlier this year, CIEL joined a multi-organization effort to write the pension funds letters with recommendations for filing comprehensive reports that truly grasp the scale of the climate crisis.

To ensure greater accountability to beneficiaries and the financial markets, pension fund managers must continuously monitor climate-related risks. They must also engage as shareholders to learn about the climate vulnerabilities of the companies they invest in. In the long term, we hope that monitoring and disclosing climate-related financial risks will serve as an important first step towards eventual divestment from fossil fuels and carbon-intensive assets and investment in clean energy and sustainable technology— sectors that will benefit from our response to climate change.

Pension funds like CalPERS and CalSTRS are key players in the transition away from fossil fuels. Across the world, their trillions of dollars in assets have a powerful potential to drive the vast changes we need to confront the climate crisis. But even as the risks associated with climate change grow day by day, many pension funds aren’t taking the necessary steps to protect their beneficiaries.

The good news is that beneficiaries themselves have power. You can engage with your pension fund using these resources to ensure that your retirement savings stay safe from the climate threat:

  • Write a letter to your pension fund’s board of trustees with questions about their plan to manage climate risks.
  • Learn more about what this type of letter should include and what it can do in our FAQ/User Guide.

Killian Dumont, CIEL Communications Intern

By Killian Dumont, Communications Intern

Originally posted on August 13, 2019