Nine months after Larry Fink famously told his investors that "climate risk is investment risk," Commissioner Allison Herren Lee made the same observation. In a keynote address at PLI's 52nd Annual Institute on Securities Regulation, she used the pandemic to urge meaningful consideration of climate risks. "Many of us now know what crisis feels like . . . . seemingly theoretical risks have become very real." She emphasized that climate risk looms larger than the pandemic with potentially graver human and economic costs. "A lesson we can take from the humbling experience of this pandemic is not to wait in the face of a known threat."
With insight, she described the connection between climate change and financial markets. "There is certainly evidence that climate risks are currently underpriced, particularly with respect to long-dated assets, utilities, commercial mortgage backed securities, and municipal bonds, among others. Underpricing can lead to abrupt and disruptive re-pricing as markets discover the anomalies."
Turning from risk to management, she emphasized the importance of uniform, consistent, and reliable financial disclosures. Financial institutions should be required to reliably disclose their exposure to climate risks, "including not just direct, but also indirect greenhouse gas emissions associated with the financing they provide."
Beyond these financial disclosures, she also drew attention to greenwashing. Mutual funds, investment companies, and credit ratings rely on labels like "green" or "sustainable," without any standardized disclosure requirements to justify these labels. Transparency and standardization of the meaning of these terms would protect consumers from fraudulent marketing. Without greenwashing, consumers could accurately protect themselves from companies that ignore or amplify the risks of climate change.
This January, Commissioner Lee Became the Acting Chair of the SEC. Will enforcing financial disclosure laws become part of the legal long-game in addressing climate change?
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