New Report Reveals SEC Must Mandate Climate Risk Disclosure Following Fatal Texas Blackouts
(Washington, DC – June 15, 2021) Existing regulations administered by the Securities and Exchange Commission (SEC) have failed to provide investors or the public with vital information about the serious risks facing Texas power companies from the devastating weather and climate change blackouts, according to a new report from the Environmental Defense Fund and the Brookings Institution.
The winter storms that hit Texas in February caused power outages that lasted for days, killed more than 150 people and caused billions of dollars in damage. Experts from EDF and Brookings reviewed the SEC filings of seven Texas companies – three publicly traded power producers and four publicly traded utilities – for their report, What Investors and the SEC Can Learn from the Texas Power Crisis. They found that the Texas electricity crisis this year was a predictable possibility, but that possibility – and the increased risk from climate change in general – was not rigorously recognized in companies’ financial reporting.
“The problems that led to this year’s fatal blackouts were extreme, but they are not unique to Texas. The Securities and Exchange Commission must demand better information if we are to protect people across America from future disasters, and that includes disclosures of climate risks that don’t leave investors and communities in the dark, ” said EDF Lead Counsel and Director of Climate Risk Strategies Michael Panfil. “We need to prevent future tragedies like the one in Texas, and to do that, we need to act quickly to, among other things, strengthen our regulations for rigorous and reliable disclosure of climate risks.”
“Academics have accumulated evidence that financial markets know very little about how businesses and municipalities are exposed to the physical impacts of climate change,” said David G. Victor, Professor of Innovation and Public Policy in the School of Global Policy and Strategy at UC San Diego, and Non-Resident Principal Investigator at the Brookings Institution. “Extreme events like what happened in Texas could become more frequent with climate change and provide a window into what companies are telling markets about their physical exposure.”
What Investors and the SEC Can Learn from the Texas Power Crisis analyzes 10-K reports from the seven companies operating in the Texas power sector. The SEC requires public companies to file 10-Ks annually that disclose financial risks and plans to address them.
However, climate-related risks are often overlooked compared to more traditional financial risks.
The report found that 10-K reports from Texas companies indicated severe weather events were unexpected, even though Texas has already suffered from severe power outages related to winter weather conditions. After cold temperatures caused power outages across the state in 2011, the Federal Energy Regulatory Commission and the North American Electric Reliability Commission urged power producers and utilities to winter their operations. Since then, climate change has made severe weather events more likely, and advances in climate science and risk analysis have made them easier to predict.
The seven companies studied in What Investors and the SEC Can Learn from the Texas Power Crisis relied heavily on boilerplate language in their 10-K documents, did not quantify potential future damage from extreme weather conditions, did not examine the possibility that events such as power outages may become more frequent and more severe due to climate change, and did not describe the potential of plans to deal with future extreme weather events.
The report found a “consistent underreporting of climate-related risks” on the part of companies, leading investors, suppliers, customers and the public to receive “generic and essentially worthless” information.
The report concludes:
“We see that although extreme weather events put human life at risk, devastate families and communities, and disrupt business operations and essential services, as manifested in the February 2021 crisis, before the crisis , companies did not provide investors with the information necessary to assess companies. exposure to the event and its associated risks.
The report found that the SEC must demand rigorous and reliable climate risk information to achieve full and transparent accounting of climate-related risks. Specifically, the report recommends that the SEC:
- Require disclosure of relevant climate information necessary to make informed business decisions.
- Recognize that the current voluntary disclosure system is insufficient and make disclosure of climate risks mandatory.
- Align disclosure requirements with advances in climate science.
The report was cited by the new Climate risk and resilience law initiative (ICRRL) in its first filing with the SEC. It is part of Brookings Risk Markets project that explored how climate change affects financial markets. You can read the full report here and the annex here.