SEC Climate Rule Will Reduce Information Asymmetry, Protect Investors, Congressman Says

Representative Sean Casten, D-Illinois, and a co-chair of the Sustainable Investment Caucus, has been an outspoken advocate for the climate risk disclosure rule, finalized by the Securities and Exchange Commission in March. Casten argues that the rule will help less-sophisticated investors protect themselves from climate risks to their investments.

The SEC’s final rule requires public securities issuers to disclose their physical and transition risks, including damages they suffer from significant weather events. They also must disclose the carbon emissions that result from their direct operations and electricity consumption, known as Scope 1 and 2 emissions, respectively.

Critics of the rule say it exceeds the SEC’s legal authority and that it will be extremely costly for issuers to implement. The U.S. 5th Circuit Court of Appeals placed a stay on the rule on March 18, 12 days after it was finalized. The SEC itself stayed the climate rule on April 4, pending judicial review. 

Risk Transparency

Casten has argued in many Congressional hearings on the rule that, as climate change worsens, sophisticated investors will increasingly try to offload risk by selling assets with high climate risk exposure to less sophisticated investors. This so-called “information asymmetry” will enable some investors to effectively offload their risks onto other, less-savvy investors.

In an interview, Casten says “it’s much easier to access capital and to succeed in capital markets if you have more information than the person on the other side of the trade. There’s been a lot of investor pressure for a long time to do this.”

Casten adds that when sophisticated investors “see risk coming, they move it into special opportunities, and sell it off to, you know, a small local pension fund.,” That’s a risk, he argues, that the climate risk disclosure rule would help protect them from.

Emphasizing the information gap between different types of investors, Casten says, “if you’re the kind of operation that can afford to hire hundreds of smart MBAs and you’ve got piles of Bloomberg terminals and you’ve got access to everybody’s SEC filings, you can you can figure out where risk is parked in the system and how to insulate yourself from that.”

But in the case of smaller investors, “If you don’t have access to all that, how would you find it?”

“Why are insurers pulling out of Florida?” Casten asks. “Because we’ve gotten [National Oceanic and Atmospheric Administration] reports that say there’s going to be two feet of sea level rise, coming to the Gulf Coast by 2050. In other words, before current home mortgages will be paid off.”

Understandably, Casten argues, knowledgeable investors want to “make sure that their portfolio is hedged out against that risk.”

Investor Popularity

Both Casten and SEC Chairman Gary Gensler have underscored that the climate rule was very popular with investors in the public comment file, even amid the public backlash from industry groups and policymakers on the others side of the debate. Casten quips, “the next time I meet with an investor that’s opposed to this rule will be the first time. I’ve never met an investor that would like less information.”

Specifically, Casten says that “the folks who I think have been most broadly supportive are a lot of the state treasurers.”

Casten notes that state treasurers and other public pension fund managers hold funds for long periods of time, and “they don’t particularly want a portfolio that requires rebalancing and adjusting every year, every six months, every nanosecond.” Given their longer time horizons, they would prefer to invest in assets that do not carry longer-term risks, such as significant climate risk exposure, he says.

Tags: climate risk disclosure, Gary Gensler, National Oceanic and Atmospheric Administration, Sean Casten, Securities and Exchange Commission, Sustainable Investment Caucus