Large financial institutions and major business sectors have long ignored, underestimated or even hid some of the major risks they face from climate change. These actions can put investments and economic stability at risk. Misrepresentations or miscalculations of business practices’ environmental soundness, often called greenwashing, and fossil-fuel-industry subsidies are two examples of how climate costs can be obscured. But such techniques might soon face a reckoning, a revamping or even a coordinated dismantling in the U.S.
Democratic Representative Sean Casten of Illinois is a former biochemist who put climate change concerns at the center of his platform when he first ran for Congress in 2018. Casten is helping to develop legislation that, he says, is designed to clear a path to a more climate-conscious economy. Such a system should be more stable, prosperous and environmentally robust than the current one, Casten says. Examples of financial instability after events linked to climate change include electricity and natural gas price spikes and bankruptcies in the wake of Texas’s power grid failure in February. A climate-related financial risks bill that Casten and his colleagues are set to introduce in Congress this week gets into the weeds of companies’ accountability to the Securities and Exchange Commission (SEC) when it comes to carbon emissions and exposure to climate risks. A lack of standards for climate-related risk reporting to the SEC makes it difficult for investors to compare and trust companies’ environmental claims and stated plans to transition away from fossil fuels, Casten says. The Climate Risk Disclosure Act would direct the SEC to close that gap and yield more reliable data on companies’ carbon-pollution claims and aims. Casten thinks the act would thus ultimately eliminate biases in our financial system that impede efforts to significantly address climate change. Scientific American spoke with Casten about the bill and why he thinks it should be of interest to science advocates and people concerned about our climate emergency.
[An edited transcript of the interview follows.]
What would the Climate Risk Disclosure Act achieve if it became law?
The bill that we are introducing is simply directing the SEC to publish rules that require publicly traded companies to disclose their climate risks. For the SEC to do that, publicly traded companies reporting to the agency would have to specify: What are your direct emissions? What are your indirect emissions? What’s the standard those are going to be calculated under? What are the reporting standards for your fossil-fuel assets? And how are you going to manage those? What sorts of scenario analyses are you doing?
Ever since the 2008 financial crisis, financial regulators have been tasked to look at where we might be populating systemic risks in the mortgage industry. In the same fashion, they need to be looking at climate change as well. For instance, which banks are holding a whole lot of assets in the form of properties that are sitting in low-lying coastal areas? On a systemic scale, almost anything we do to invest in lower CO2-emitting energy-generation assets is also an investment in lower-cost energy-generation assets. That’s good for the aggregate economy, but it also means a tremendous amount of wealth movement in the economy. There are some localized pockets of financial markets that may seize up.
Where does climate science come into the conversation surrounding these changes?
If you, as an investor, understand the climate science and want to move your capital into assets that are going to protect you, at some point, you say, ‘Okay, we know there’s two feet of sea-level rise coming.’ It’s easy to look at a topographical map and say, ‘I would like to move my capital away from that exposure.’ But you don’t have an easy way to do that right now as an individual investor or as the California pension system, because there’s no consistent way companies report that risk. So you’ve got this issue where the science has been understood for decades, but the ability to move capital in response to that science doesn’t have a consistent scoreboard.
The idea is: let’s make sure everybody’s using the same metrics. If I were an investor, I’d love to be able to preferentially invest in a portfolio of companies that are reducing that CO2 faster than others, because that would be a fantastic hedge against exposure I may have elsewhere in my investment portfolio. And to do that, I need to make sure that I’ve got the math.
Do other countries face similar problems?
The Europeans have been leading the way on coming up with a carbon accounting system. Suppose I’m a factory owner in Spain who’s buying zero-CO2-emitting electricity from a French nuclear plant in order to make some product. Who gets credit for the zero CO2 electricity—the French nuclear plant or the Spanish manufacturer? There’s no right answer to that question, but you need to have an accounting system that doesn’t have any double accounting.
How might this bill stimulate companies to reduce their carbon emissions?
We don’t currently disclose climate risks in our financial system, so we don’t quantify the risk. Capital markets don’t have a way to evaluate it. Until this bill is signed into law, that missing information has the practical effect of massively subsidizing players who are amplifying the risk and massively under-rewarding entities that are minimizing the risk.
Why is this the right moment to standardize climate risk disclosures?
The right time to start taking climate seriously was about 50 years ago. Huge changes to our economy are already underway as a result of the climate. Investors might reasonably want to change their portfolios around to manage that. And yet the SEC is not currently required to say to companies, ‘If you’re going to make low-carbon commitments, you’re going to have to disclose how you calculated your CO2 emissions. How are you changing your risk protocols? What are your governance structures to make sure that you’re managing all that?’ And with the SEC currently not asking those questions, auditors aren’t really auditing it. In the worst case, companies are issuing statements to greenwash themselves. In the best case, companies are doing this with the best of intentions but do not know if they can add up all their CO2 commitments and have a meaningful number.
Why should people who value scientific research care about a climate-resilient financial system and this bill?
If you’re accurately pricing the risk of climate change, you’re going to see a ton of money flow toward people who are taking actions to reduce the risk of climate change. And those actions include, but are not limited to, doing the research and design to develop the technologies of the future. It’s really as easy as that.