Climate Change is Expensive: Financial & Regulatory Agencies Seeking Public Input on Climate Risk

Climate Change is expensive — the U.S. has experienced over $400 billion in weather and climate disaster costs since 2014[1] and climate experts warn the costs to the national and local economies and to households are only rising[2]. The challenges inflicted on communities by storms, fires and extreme precipitation and flooding, will aggravate infrastructure that is ill-prepared to handle, or adapt to the coming changes and will lead to increased asset damage, loss and displacement unless actions are taken now to address the risks and find solutions to mitigate and adapt to changing conditions[3]”.

Not surprisingly, investor demand for, and disclosure of information about climate change risks, and impacts to assets and business is growing dramatically. To keep pace with increasing investor interest and buoyed by the newly elected federal administration and heightened public sentiment and sensibility about the risks of extreme climate impacts, leading regulatory and financial agencies are opening a forum for public input with an eye toward facilitating the disclosure of consistent, comparable, and reliable information on climate change. Submitting your comments to one or all of these agencies will ensure the participation of a wide range of stakeholders in these important forums so that we can both bolster the agencies’ ability to increase awareness of climate risk, as well as identify opportunities to reduce risk.

Notable requests currently include:

Securities and Exchange Commission (SEC): The mission of the SEC is to protect investors; maintain fair, orderly, and efficient markets; and facilitate capital formation. In 2010, the SEC voted to provide public companies with interpretive guidance on existing SEC disclosure requirements as they apply to business or legal developments relating to the issue of climate change. The relevant disclosure rules cover a company’s risk factors, business description, legal proceedings, and management discussion and analysis. The SEC’s interpretative guidance highlights the following areas as examples of where climate change may trigger disclosure requirements:

• Materiality impact of legislation and regulation: When assessing potential disclosure obligations, a company should consider whether the impact of certain existing laws and regulations regarding climate change is material.
• Impact of international accords: A company should consider, and disclose when material, the risks, or effects on its business of international accords and treaties relating to climate change.
• Indirect consequences of regulation or business trends: Legal, technological, political and scientific developments regarding climate change may create new opportunities or risks for companies. As such, a company should consider, for disclosure purposes, the actual or potential indirect consequences it may face due to climate change related regulatory or business trends.
• Physical Impacts of Climate Change: Companies should also evaluate for disclosure purposes the actual and potential material impacts of environmental matters on their business.

Today the SEC is seeking Public input on the Commission’s disclosure rules and guidance as they apply to climate change disclosures, and whether and how they should be modified, potential new disclosure requirements as well as new disclosure frameworks that the Commission might adopt or incorporate in its disclosure rules. In addition to the questions set forth below, comments generally as to how the Commission can best regulate climate change disclosures are welcomed.[6]

SEC Submission Rolling: SEC.gov | Public Input Welcomed on Climate Change Disclosures

Moody’s: Moody’s (NYSE:MCO) is a global risk assessment firm that empowers organizations to make better decisions. Its data, analytical solutions and insights help decision-makers identify opportunities and manage the risks of doing business with others. Moody’s recognizes how increasingly extreme weather events and growing awareness of the severity of climate change is driving investors, banks, insurers, and companies to identify, quantify and manage their climate-related risks. Moody’s is driving systemic climate and sustainability action by bringing clarity on ESG risk to capital markets through credit ratings, ESG assessments, climate risk scores, sustainable bond, loan reviews, ESG specialty indices, and other risk management solutions.

In this request for comment, Moody’s is seeking to update the General Principles for Assessing Environmental, Social and Governance Risks cross-sector rating methodology with the addition of guidance to provide more detailed information on the principal considerations for assigning Environmental, Social and Governance issuer profile scores (IPSs) and credit impact scores (CISs) for regional and local governments (RLGs) globally.

Moody’s Submission by March 22: Request for Comment

The Federal Housing Finance Agency (FHFA): FHFA is seeking information on the current and future climate and natural disaster risk to the housing finance system and to the regulated entities. The agency has recognized a growing body of research that climate change and natural disasters pose to the stability of the economy, the financial system, the national housing finance markets, and FHFA’s regulated entities including: the Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac), and the Federal Home Loan Banks (Banks). Some of this research has examined whether and to what extent government policies might exacerbate climate and natural disaster risks through moral hazard or by otherwise incentivizing risk-taking. Other areas of study include the current and future efficacy and availability of traditional climate risk mitigants, such as the National Flood Insurance Program and hazard insurance policies. The growing research recognizes that natural disasters could result in increased loan delinquency rates, default rates, credit losses, credit related expenses, and loan loss frequency and severity.

Through the RFI, FHFA’s goal is to ensure that the regulated entities 1) operate in a safe and sound manner, 2) fulfill their statutory missions, and 3) foster the liquidity, efficiency, competitiveness, and resiliency of the national housing finance markets. FHFA also seeks input on opportunities to strengthen its supervision and regulation of the regulated entities’ management of and reporting on the physical and transition risks that may arise from natural disasters and changes in climate patterns.

FHFA Submission of Input by April 19: Climate and Natural Disaster Risk RFI (fhfa.gov)

[1] 2018’s Billion Dollar Disasters in Context | NOAA Climate.gov

[2] What is the economic cost of climate change? | World Economic Forum (weforum.org)

[3] Hearing: The Costs of Climate Change — Risks to the U.S. Economy and the Federal Budget | House Budget Committee Democrats