New report backs reinstatement of investor rights under climate-conscious US President and calls for more collaboration.
The US Securities and Exchange Commission (SEC) and Department of Labour (DoL) need to reinstate and reinforce the freedom of investors to address climate risk in their investment decision-making, according to non-profit organisation Ceres.
In its ‘Turning up the Heat’ report, Ceres said the regulators should issue new rulemaking or amend existing rules that “place limits on investor rights” when it comes to mitigating climate risk.
As investors filed more than 140 climate-related shareholders proposals last year, with six resolutions earning majority voting support, “the SEC and DoL both took aggressive steps last fall to limit investors’ ability to use them”, Ceres noted.
“Many of the tools that investors have long relied on to consider climate factors in their investment holdings were stripped away in the fall of 2020 under the Trump administration,” the report said.
Last year, the SEC toughened requirements under Rule 14a-8, known as the shareholder proposal, meaning that three-quarters of investors in 99% of the S&P 500 are ineligible to file resolutions.
The DoL limited the extent to which fund managers are able to consider climate and other ESG factors within 401-Ks and other retirement plans covered by the Employee Retirement Income Security Act (ERISA), which manages over US$15 trillion in AUM.
The report is calling for a reversal of these changes.
Making climate a mandatory priority
To catch up with progress made in other major jurisdictions, Ceres has also backed investor calls for mandatory climate-related disclosures.
The report advised the SEC to issue an Advance Notice of Proposed Rulemaking inviting public comment on the potential scope for implementing mandatory climate change disclosure rules.
“Other federal financial regulators should coordinate with the SEC and identify opportunities to get additional climate change disclosures from industries that they supervise,” the report added.
This follows research published by the CFA Institute in October 2020, which outlined that 40% of 3,000 investment professionals factored climate risks into their decision-making, but over half of that number said they lack the climate-related disclosures they need to inform their decisions.
The SEC has made progress in this area. In February 2021, Acting Chair of the SEC Allison Herren Lee directed staff to focus on the possibility of a climate-relaited disclosure framework, potentially leveraging the widely supported Task Force on Climate-related Financial Disclosure (TCFD) guidelines.
In early March, the SEC launched the Climate and ESG Task Force in the Division of Enforcement to lead efforts.
The report further recommended that the SEC should work closely with the Financial Accounting Standards Board (FASB) to provide more clarity as to how climate change disclosures can be incorporated into financial statements.
Financial regulators need to collaborate
Beyond the SEC and DoL, Ceres said all US financial regulators, state and federal, need to immediately affirm the systemic nature of the climate crisis and its impact on financial market stability. This should be in the form of a statement from the agency chair or an agency-issued report.
Regulators should then “activate action on climate-related measures, including prudential supervision, investor protections and enhanced climate disclosure mandates”, and be willing to work collaboratively with one another in order to do so effectively, the report said.
This follows a report published by Ceres in June 2020, which outlined how climate change is threatening the stability of financial markets and the global economy, reiterating the need for US financial regulators to address climate risk as part of their existing responsibilities.