Climate Risk Disclosure: SEC’s Next Modest Proposal

An article in the Wall Street Journal this week reports as breaking news something that has been obvious for months: The Securities and Exchange Commission (SEC) may require publicly traded companies to disclose quantified and auditable climate change risks, “a step that could expose [the companies] to new litigation threats.”

Indeed, it could! As CEI explained in one of its comment letters on the SEC proposal:

The climate risk disclosure movement is no mere chronicler of [climate policy-related] transition and liability risks but an active contributor. Politically, the function of climate risk disclosure is to extract confessions from fossil fuel companies that their business models are unsustainable in a carbon-constrained world. Such confessions could to some degree decapitalize and defund the companies, as investors and banks tend to shun businesses perceived to lack assets of durable value.

The confessions could also invite litigation by shareholder groups claiming the companies committed fraud by overpricing asset values in the past. Such litigation could further spook investors and lenders, causing additional capital flight. As capital and credit ratings decline, so would the companies’ ability to fend off legal and political predation. A death spiral is easily imagined in which pension funds, retirement accounts, and other owners of fossil-fuel company stock lose their shirts. In Climate Speak, this strategy is called “protecting shareholder value.”

A hot tip (from my imagination) has it that the SEC has another modest proposal in the works: Require corporate disclosure of nuclear conflict risks.

The rationale could not be simpler. In 2020, the United States, Russia, the United Kingdom, France, China, India, Pakistan, Israel, and North Korea possessed 13,400 nuclear weapons, of which 3,720 were deployed with operational forces. Approximately 1,800 of these are kept in a state of high operational alert. Lord only knows how many rogue non-state actors may also possess or someday obtain small nukes. Detonation of any of those devices could destroy your business!

So, expect the SEC to soon require publicly traded firms to disclose their nuclear blast and fallout risks. In their regulatory filings, firms will have to address two main questions:

• How could nuclear war affect your company’s physical assets, workforce, customer base, and suppliers?
• What steps is your company taking to mitigate those risks?

According to a leaked draft of the proposal, federally approved mitigation strategies include:

• Relocate critical buildings, facilities, and personnel away from major population centers;
• Build on-site blast shelters, air filtration systems, and decontamination facilities;
• Stockpile food, water, and medical supplies; and,
• Install secure underground power generation, waste disposal, and communications facilities.

Won’t that cost trillions of dollars? Yes, but remember, “inaction” is the costliest policy of all!

Companies will also be instructed to track and report their Scope 3 risks—those resulting from assets not owned or controlled by the reporting organization but which fall within the firm’s value chain. Firms must also report the steps they are taking to improve value-chain sustainability.

Hiding or minimizing nuclear conflict risks in SEC filings inflates asset values and defrauds shareholders. Firms that do not comply with the new disclosure requirements may be sued by shareholders and will be investigated by the SEC and state attorneys general.

Readers may wonder why the SEC does not already require nuclear risk disclosure. First things first! Biden administration climate envoy John Kerry put it best: “[C]limate change is perhaps the world’s most fearsome weapon of mass destruction.”