The U.S. Securities and Exchange Commission wants to standardize climate disclosures for publicly traded companies. What does that mean?
On March 21, 2022 the SEC released a proposal for a new rule: publicly traded companies will have to provide disclosures about how the changing climate will affect their business, and how their business is affecting climate.
This move would formalize a reporting system for climate-related disclosures that investors are increasingly demanding. Climate Now sat down with Nir Kaissar, a market economics columnist for Bloomberg Opinion and portfolio manager, to understand what these proposed disclosure requirements entail, how they fit into the scope of the SEC's mandate, and what the impact of their adoption will be for businesses, investors, policymakers and the public.
“People often make the argument that if you left this to the market, if investors truly do want the information, they'll get the information. I'm not entirely persuaded by that… If it were true that the market could deal with this on its own, then probably the SEC would have never come into existence in the first place… One of the things we learned after the so-called great crash in 1929 was that a lot of investors didn't have the information they needed to see some of these risks coming. So yes, I think we have hands-on experience about where that argument fails.” - Nir Kaissar, Columnist for Bloomberg Opinion
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Full Transcript and References
[00:00:00] James Lawler: Welcome to Climate Now, I’m James Lawler. We have an exciting announcement to make at the top of this episode, which is that Climate Now has been nominated for the 26th Annual Webby Awards in the Video Science and Education category. The Webby Awards honor internet excellence internationally. Climate Now is very honored to be nominated alongside organizations like National Geographic and BBC.
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[00:00:40] James Lawler: Today we’ll be speaking about business climate reporting. On March 21st, 2022, the U.S. Securities and Exchange Commission, or SEC, proposed rule changes that would require publicly traded companies to disclose climate information.
[00:00:56] James Lawler: The proposal is under comment until May 20th, 2022, and once adopted it will phase in requirements for publicly held companies to assess and disclose their climate-related risk, greenhouse gas emissions, and how they are aligning their business models to be prepared for a changing climate and energy transition. Here to speak with us today about why the SEC is proposing these rule changes and how they might impact businesses is Nir Kaissar. Nir is a Bloomberg Opinion columnist covering the markets and the founder of Unison Advisors, an asset management firm. Nir, thank you so much for joining us on Climate Now.
[00:01:30] Nir Kaissar: Thanks for having me.
[00:01:32] James Lawler: Let’s start with a bit about you. How did you become a portfolio manager and a Bloomberg columnist?
[00:01:36] Nir Kaissar: How did I get here? I was a business and English literature student in college, which, I didn’t know at the time would prepare me well for financial writing, the left brain-right brain combination. I went from college to work for the consulting arm of the Ernst & Young firm. This was in the late 1990s, and I was doing valuation work. During that time, it was just the beginning of the .com boom, and there was a lot of interest in takeovers and MNA activity, et cetera, so I worked for a group that did valuations for MNA mergers and acquisitions, mostly in the healthcare space. Then I went to law school, believe it or not. I practiced corporate law on Wall Street for number of years in the 2000s. Then I left to start an asset management firm, and I’ve been doing that ever since. I joined Bloomberg in 2015, and I’ve been writing for them since then.
[00:02:26] James Lawler: What we’d like to talk about today is the SCC Proposal for Climate Disclosures. I’m wondering if you could sort of set the table for the conversation by describing what exactly this proposal is?
[00:02:37] Nir Kaissar: That’s a pretty good place to start. In broad term, and what this does is it requires public companies to disclose climate related risks. I would categorize them in two ways. One is, they want companies to provide disclosures about how climate in general is going to affect their business, their line items on their financial statements, their business more broadly. Obviously, that requires companies that are not thinking about this, to think about this, but companies that are already planning around this will have to disclose what they know, what they plan, et cetera.
[00:03:10] Nir Kaissar: There are a fair number of companies that have done, or are doing, work around this. They’re just not telling anyone about it. This would require them to tell investors and shareholders about it. The second thing is, they’ll have to disclose basically greenhouse gas emissions directly and indirectly, meaning their own emissions, but also the emissions of the energy that they consume and potentially even further downstream, the products that they buy and that they trade in, and the impact of those emissions they’ll have to potentially disclose as well. It’s pretty broad and far-reaching, I would say.
[00:03:48] James Lawler: Now, could you contextualize this proposal within the SEC’s charter or framework? Why does the SEC exist, and how does this proposal align with their reason for being?
[00:04:01] Nir Kaissar: Yeah, so I think that’s a really important question because critics of this proposal have come out and basically accused the SEC, the Securities Exchange Commission, of weighing into climate policy. And they’re doing nothing of the sort.
[00:04:16] Nir Kaissar: I think it’s really important to clear up that confusion. The Securities Exchange Commission was created in the 1930s after the Great Depression. There was a great market crash in 1929, basically to 1932. From that came this commission, and it was charged with the protection of investors primarily by requiring companies to disclose information that would be useful for investors to make decisions.
[00:04:40] Nir Kaissar: The reason that’s important to understand is because this is really just another step in that chain. The SEC has long required companies to make all kinds of financial disclosures, and if you read an annual statement of a company, it’s tens of pages at least deep of various disclosures, and climate disclosures may not have been important 30 or 40 years ago, although I would argue they probably were, we just didn’t know that. But now that we know that they are, and certainly companies themselves, as I mentioned, know that they are, it’s completely appropriate for the SEC to say, “this is information that you should disclose to shareholders and investors, because they need to know about it.”
[00:05:19] Nir Kaissar: So, that’s really the SEC’s job. The SEC’s job is to get information to investors that investors want in order to make decisions.
[00:05:28] James Lawler: SEC’s position is investors should have access to information to allow them to properly gauge the risks that they’re taking with their capital.
[00:05:37] Nir Kaissar: And opportunities, I might add.
[00:05:41] James Lawler: Great point, and to that end, why are emissions disclosures material considerations when assessing the risk of investment in a given company? How do emissions disclosures connect with the risk that an investor in a given company might be taking?
[00:06:02] Nir Kaissar: I would say, both of the prongs that I talked about, emissions being one of them, they directly affect companies.
[00:06:09] Nir Kaissar: It seems to me, and I’m not alone, it seems to many investors that we clearly have seen in recent years the impact of climate change on companies, regardless of what you think of climate risk. There are severe weather events that are occurring a lot, and they have already affected many companies across industries, and so I think it’s important for investors to understand, to what extent are these companies in harm’s way, either because of where they’re located, the decisions that they’ve made, where they’ve planted themselves, and so on. That’s a direct threat to companies and companies are thinking about this, and so they should tell investors and shareholders, how they’re thinking about it.
[00:06:50] Nir Kaissar: Emissions are really a question of where the industry and the economy are going to go, and how that’s going to going to impact companies. For example, companies that are direct emitters, their business might have to change in the coming years.
[00:07:07] Nir Kaissar: For various reasons, because of policy, because of weather-related events, the question is what are they planning to do about it and how are they going to transition? That’s a business risk. If you’re a long-term investor in a company, you want to know about that. The other thing is that it’s a little bit more intangible, but emissions could have an impact on companies in ways that aren’t directly related to their business. To the extent that companies are thinking about this, and like I said, I think they have, then that’s another thing that they should disclose to investors.
[00:07:39] James Lawler: I’d love to drill a little bit more into those two points you just made. The first one being that in an environment where the world is more concerned about the changing climate, there may be increased costs to companies that emit more. The types of costs that are coming to mind are, for example, a price on carbon, which would be a direct cost to large emitters. There could also be increased public pressure against companies, there could be pressure on investors to divest from such companies. Are those the kinds of costs you’re thinking about or are there other things beside that, like penalties that large emitters would face, that investors today should know about in the SEC’s estimation.
[00:08:22] Nir Kaissar: That’s definitely one application, and that’s what I was trying to describe as the more tangible. Let me give you a tangible one that I think everyone will understand, which is say you’re an oil company and say that everyone’s going to be, and I don’t know if this is going to happen, but let’s just say you wake up in 10 years and everyone’s driving an electric car. What does that do to Exxon Mobil? There are going to be transitions around energy use, and there’s going to be downstream effects from this to the extent that companies are in this business and their business is going to have to change. If not, they’re going to become dinosaurs and they’re going to disappear.
[00:08:58] Nir Kaissar: The thing is, a lot of the companies that you take for granted today are not going to exist in 30 years, 40 years, and one of the reasons is going to be climate related. They need to prepare for that today, to the extent that if they’re not preparing for it today, investors need to know about that. We’re really talking about very tangible impact on business, but you’re right to say we’re also talking about the regulation that would come from government, consumer preferences, these are all in play, and these are all things that companies should tell investors about.
[00:09:34] James Lawler: This is a proposed disclosure. What does that actually mean?
[00:09:40] Nir Kaissar: It’s relatively straightforward, but the way it works is there’s a proposal that is put out. Investors, observers, really anyone, you and me, can comment about the proposal. The SEC will take those comments into consideration and then they’ll issue final rules.
[00:09:54] Nir Kaissar: But the thing to know is that once the rules have been proposed, they’re well on their way. The only question is going to be, how are they changed around the edges? It would be very unlikely for those proposals to be changed wholesale.
[00:10:07] Nir Kaissar: What percentage of companies today are regularly assessing climate risk and their emissions? Because it strikes me that that’s probably a very small percentage of the total number of companies that would have to comply with this rule.
[00:10:21] Nir Kaissar: That’s the million dollar question. This is why we need companies to communicate with us more than they do. When I say us, from the perspective of the SEC, I’m really talking about shareholders and investors, and it’s going to have more downstream effects, which I’m sure we’ll get into, but the important thing is that we were in the dark about all this, and all we can do right now is speculate. My guess is that more companies are thinking about this than you think because ultimately, these are very shrewd, smart people with sharp pencils who are in the business of making money, and they understand that these are big risks and they don’t want to be caught flat-footed after all the extreme weather events we’ve seen in the last few years.
[00:11:05] Nir Kaissar: My guess is the vast majority of them, I would say, are thinking about this. The bigger reveal is coming. What’s going to be interesting is, to the extent that they haven’t been thinking about this, it will be very embarrassing for them to say so. How will they handle that?
[00:11:20] Nir Kaissar: I mean, can you imagine a company in a year or two from now coming out and saying, well, “we just haven’t done any work on this, sorry, folks! We’ll get to work, and we’ll let you know in a few years what we think.” It’s hard for me to imagine that, so my guess is companies that haven’t done any work are a minority. Those companies are getting the work literally yesterday.
[00:11:40] James Lawler: Right. Let’s turn to the downstream impacts of this. How would you describe the landscape that these rules create for businesses?
[00:11:50] Nir Kaissar: Let me take a step back and think about this more broadly. One of the things we take for granted, and I think one of the reasons we take it for granted is because we don’t have enough information, is corporate America’s footprint.
[00:12:01] Nir Kaissar: It’s a huge footprint. Corporate America employs about half the people in this country. It has a huge impact on pretty much every aspect of our lives, more now than maybe ever before, given how big public companies have become, particularly at the very top, and how impactful they’ve become. Think about Walmart. Think about Amazon. Think about the very big players and how impactful they’ve become, and the reason that’s important to understand is, if you think about that, then you know people in this country who are making policy, whatever it is, whether you’re interested in climate, whether you’re interested in human capital management, whatever it is that you’re interested in that’s a big public policy problem, or at least an agenda item, let’s just say, without editorializing too much, you’re going to need to know what corporate America’s up to.
[00:12:57] Nir Kaissar: Beyond shareholders and investors, let me just give you, if you’ll forgive me, a non-climate question that would be very useful to know. What are wages like at publicly traded companies? What publicly traded companies employ half of the people in this country? What are they paying their employees? We don’t know the answer to this question. How do we fashion public policy? If we don’t know what half of the people in America are getting paid? And it’s not that the companies don’t know. I mean, we can argue when it comes to climate about what they have done, what they haven’t done, what they know, what they don’t know, but we cannot argue when it comes to wages, right?
[00:13:33] Nir Kaissar: They know what they’re paying their people, they’re paying them. The same thing is true about climate. The downstream effects that I have in mind is, it will allow researchers, academics, think tanks, Congress, policymakers at the state and local level, to peer into what corporate America is up to and fashion more targeted policy that gets after the vulnerabilities. That is something that we simply cannot do today.
[00:14:01] Nir Kaissar: Now, let’s not conflate that with policy. The SEC’s job is to provide investors information. The fact that that information will also be useful to others does not mean that the SEC is fashioning policy. It just means that they are giving us the data, us being not only investors, but the broader community, to do with that data what we want. The fact that that data is also going to promote smarter public policy is something that should be celebrated.
[00:14:31] James Lawler: What kinds of policy might come out of the revelation of all of this data, in your mind?
[00:14:37] Nir Kaissar: Well, who are the emitters, for example? Directly and indirectly, what businesses are really contributing the most to greenhouse gases? We can estimate these things today and you would know, James, better than I would, how finely we can estimate that with respect to corporate America. But I think whatever that answer is, I think it’s safe to say that with direct disclosure, we won’t really need to estimate. We will actually have the data.
[00:15:04] James Lawler: Let’s just say that you have not yet started, and you’re behind the eight ball and you need to get this work done. How do you do it?
[00:15:13] Nir Kaissar: I will tell you that I have a high degree of confidence that there is an infrastructure that’s already there for companies to tap into. One of the requirements of this proposal is that companies, when it comes to emissions, will need third-party verification. And there is an industry of verifiers out there that will step in and provide that service.
[00:15:35] Nir Kaissar: You know, if it didn’t exist, it would be problematic. So, at least with respect to emissions, I think it’s relatively easy, to the extent that, if they don’t know what to do, they can pick up the phone, they’ll have to pick up the phone anyway, they’ll call a verified company and the verified company will tell them what to do.
[00:15:48] Nir Kaissar: It’s a harder question with respect to the actual business risks, and I think there, to the extent they haven’t done any work, they’re going to have to roll up their sleeves and do real thinking. I mean, what I envision is, some people around the boardroom pulling out their financial statements line item by line item, and thinking about what the risks are. And again, I don’t think they have to start from scratch. I think there are a lot of smart people who have thought about this. There’s a lot of literature out there about climate-related business risk that they can tap into. It’s going to be a lift, they’re going to have to do work, and they should do work. To the extent that these rules push them in that direction, then I think it’s all for the best.
[00:16:34] James Lawler: One of the criticisms that you addressed in an article you wrote recently in Bloomberg was that this is an overstep by the SEC because it gets into, quote, ESG territory, and ESG is used for a lot of different purposes by different people. I wonder if you could just reflect on the statement that you were rebutting, and this term ESG in particular?
[00:17:07] Nir Kaissar: ESG’s a funny thing. When I get ahold of the pioneers of this ESG movement, they really dislike the tag. They wish that they could’ve tagged it differently at inception. I find that that’s common to all pioneers, you know, they don’t name it, they just do it because they’re just smart, thoughtful people, and it’s named by somebody else and they’re like, oh, we wish we had done more at the beginning. We’re stuck with it, we’re not going to get rid of it. ESG, for the uninitiated, is environmental, social and governance, and ESG is widely misunderstood. If I can just get on my soap box for a minute, ESG is an investing style. It is often confused with a values/impact movement. It is not that. It is a, people hate to hear this, they really don’t want this to be true, but I think it’s useful to understand ESG is really a portfolio management tool. What it does is, it’s trying to identify companies with either risks or opportunities along the environmental, social , and governance spectrum that, when considered in a portfolio, can be expected to result in a better performing portfolio, either because it reduces the risk of that portfolio, or because it increases the return of that. That’s what ESG is.
[00:18:40] Nir Kaissar: Now ESG, like any investing style, requires data. You need data, you need inputs in order to get the output. People confuse the data with ESG. ESG is what someone chooses to do with data around environmental, social, and governance, but the data itself is not ESG. The data itself is data, and you can do whatever you want with it. The reason I’m sort of taking the time to unpack this is because, just as it’s important not to conflate this SEC proposal with policy, it’s also important not to conflate this SEC proposal with ESG.
[00:19:13] Nir Kaissar: The SEC is giving investors the tools to the extent that they’re ESG investors, to use that data, but it doesn’t preclude other investors using that data. If you are a values or impact type investor, that data will probably also be useful to you. There are many applications to this, and ESG just happens to be one.
[00:19:37] James Lawler: What are the behind-the-scenes interactions that lead to the release of this rule, and how long do you think this has been gestating and what was the final straw that made this inevitable on behalf of the SEC?
[00:19:54] Nir Kaissar: I would say it’s hard to generalize because every rule is different, but on this particular one, I would say that it was a groundswell of interest from investors about this type of information. To be honest, I’m surprised it’s taken this fall because it’s really the big investors, I mean, think about pensions, big endowments, sovereign wealth funds. We’re talking about trillions of dollars that are being invested, and these folks are looking at these risks and they’re saying we don’t have enough information to make the decisions that we want to make. The reason that these big players are important is not only because they’re big players, but also because by virtue of their size, they own everything.
[00:20:39] Nir Kaissar: They sometimes refer to themselves as universal investors. Meaning that, when you run trillions of dollars, you can’t just own Amazon or whatever, you know? You and me can own five stocks, if we want. If you run a trillion dollars, you don’t have that luxury. You have to literally own every asset in the world. If you’re forced to own every asset in the world, then you’re also forced to care about every asset in the world. You really need to know what’s going on at these companies. These big investors have been in the SEC for, I would say years, over a decade, telling them, these are the types of things that we need to know and we’re not going to get them from companies unless you compel the disclosure. It was really a groundswell of interest from investors that resulted in this, incidentally, will result in other human capital management-type disclosure, I think that’s coming next, but there are other disclosures that investors have been in the SEC’s ear about.
[00:21:33] Nir Kaissar: That’s why they’re doing this. They’re doing this because investors want it.
[00:21:37] James Lawler: And I also imagine that, by the SEC mandating these disclosures, it creates a valuable repository of data for investors because everyone’s reporting in the same way, no?
[00:21:47] Nir Kaissar: I think that’s a very important point. I mean, that’s one of the most forceful arguments for compelling disclosure, which is that if you leave it up to companies, people often make the argument, if you left this to the market, if investors truly do want the information, they’ll get the information.
[00:22:09] Nir Kaissar: There is some truth to that. I’m not entirely persuaded by that. Partly because you’re always going to have some holdouts. And like I said, for universal owners, they don’t really have the luxury of cutting the holdouts out of their portfolio. I don’t think it’s economically feasible, from my perspective.
[00:22:26] Nir Kaissar: And I would go further. I would say that if it were true that the market could deal with this on its own, then the SEC would have never come into existence in the first place. One of the things we learned after the so-called Great Crash in 1929 was that a lot of investors didn’t have the information they needed to see some of these risks coming.
[00:22:44] Nir Kaissar: So, we decided to deal with this by basically making information available. So yes, I think that we have hands-on experience about where that argument fails. One of the reasons why a SEC is important is because even if you did leave it to the market, you’d have different conventions of disclosing the same thing.
[00:23:07] Nir Kaissar: The SEC is the only person that would come along and say, not only do we want you to disclose X, we want you to disclose it in Y fashion, right? This is the way we want you to do it. And not only that, it’s a repository for the information in one place. As an investor, I can go online and I can have data that’s conformed for me across companies, across industries, in one repository where I can access it relatively easily. That’s a function that only the SEC can play.
[00:23:36] James Lawler: How will this impact, do you think, smaller asset managers, you know, you’re an asset manager yourself. There’s a huge industry in private equity, for example, that buys companies that are not public companies. I wonder if you could reflect on how does this impact the investing ecosystem outside of publicly traded companies and these trillion-dollar investors that invest in them?
[00:23:57] Nir Kaissar: Well, a couple of things. One is there has been a movement in recent years away from companies choosing to stay private longer, or just avoiding the public markets altogether, and we don’t know exactly why. One of the things that you often hear is, one of the reasons companies are doing this is because we’veso much regulation on top of them, disclosure rules and so on, that they’d just rather be private and not have to deal with these disclosure rules.
[00:24:27] Nir Kaissar: That’s possible. I’m skeptical that that’s driving their decisions, and I don’t think that you’re going to see meaningful movement between the private and public markets as a result of this proposal, or any other proposals that are going to come down the pike. That’s just my own personal view. But the second part of that is that is really how it’s going to impact investors themselves, big and small.
[00:24:51] Nir Kaissar: I think for big investors, the ones that we were just talking about, I think it will help their process tremendously because like I said, they’re universal owners and they’re looking at these companies very closely. You have huge teams that are in constant contact with these companies, so, you know, they’ll have a basis on which to have more meaningful conversations with them and the like, so there’ll be impacted on day one. In terms of people like individual investors, people like you and me, I don’t know that the impact is going to be obvious on day one, because I think it’ll take time for this information to get into the information stream.
[00:25:25] Nir Kaissar: It’s going to take time for funds, let’s say, ETFs, mutual funds, and the like to, incorporate that information into their own process. I think new products will come out that use this data in order to sort through companies. Think about, you know, our listeners might be familiar with value funds or growth funds, what are they doing? They’re just sorting publicly available information on companies and compiling portfolios with companies with like characteristics. The same thing will be true with this data. You might have a fund that says, you know, this is a fund of companies with emissions less than X, or this is a fund of companies that has thought about climate change in Y way, or whatever it is, those products I bet will come to market, and it just means that people like you and me will just have more options about how to invest along the climate related spectrum, but that’ll take some time. That’ll be, I think a year or two, three, down the road
[00:26:24] James Lawler: That was Nir Kaissar, our Bloomberg Opinion columnist and founder of the asset management firm, Unison Advisors. That’s all for this episode of the podcast. Climate Now is made possible in part by our science partners, the Livermore Lab Foundation.
[00:26:37] James Lawler: The Livermore Lab Foundation supports climate research and carbon cleanup initiatives at the Lawrence Livermore National Lab, which is a Department of Energy Applied Science and Research Facility. More information on the foundation’s climate work can be found at livermorelabfoundation.org.
[00:26:51] James Lawler: To listen to our interview with Emily Wasley about the Task Force for Climate Related Financial Disclosures or our episode with Tory Grieves about analyzing business climate risk, or other interviews from Climate Now, to watch our videos or sign up for our newsletter, visit climatenow.com. If you’d like to get in touch, you can email us at contact@climatenow.com, or tweet us at @weareclimatenow. We hope you’ll join us for our next conversation.
Explaining the SEC's proposed climate disclosure rules