For generations, investors have demanded and received information from companies about the financial risks and opportunities they face. This kind of disclosure is a basic tenet of how capital markets work: companies provide information and then investors decide how to act upon it.
Yet somehow missing from this equation has been a clear picture of how companies are managing one of the greatest financial risks of our time: climate change and the local, national, and global costs to our economy it creates, and of course to our future.
Despite the clear impacts that worsening droughts, heatwaves, and storms have on supply chains, workforces, infrastructure, facilities, and economic productivity, companies have not been required to report the risks they are exposed to from climate change or how their operations contribute to creating those threats. Investors and other stakeholders — including consumers, employees, and communities — have been left in the dark about how companies are responding to these threats, and how they are adapting to a changing business and policy environment that is designed to tackle them.
That is now about to change in the United States.
This week, California lawmakers passed a first-in-the-nation legislative package that, on first blush, may sound like a highly technical matter of bookkeeping, but in fact represents a watershed moment for corporate transparency and climate risk management that will have nationwide impacts.
Under the two-bill package, which awaits the signature of Gov. Gavin Newsom, large companies that do business in the state will now be required to report their climate pollution across their supply chains, as well as the risks they face from a warming climate. Some 10,000 companies are estimated to face new reporting requirements.
This is exactly the kind of financially prudent policy that Ceres, the organization I lead, has championed for more than three decades. Founded by and for capital market actors, Ceres has long worked with investors who have wisely recognized that climate change and other sustainability issues represent a major threat to companies’ bottom lines and their investors’ portfolios. That’s why investors have demanded information about how companies are adapting to both a changing climate and to a changing policy and business landscape meant to address it. And now they’re going to receive it.
Notably, the California bills were backed not only by investors but also by major companies that will themselves be subject to the rules. Nearly 30 companies and industry associations — including Microsoft, Salesforce, IKEA USA, Apple, and the American Apparel and Footwear Association — actively supported the legislation as it wound through the state legislature.
The reason why? Many companies already provide climate disclosure on a voluntary basis, because they recognize that it helps them manage their risk and take advantage of the shift to a low-carbon economy. Just as investors demand information to ensure they can efficiently allocate capital, the companies providing that information deserve a level playing field — a consistent, standardized, and reliable reporting process that applies economy-wide — so they can attract that capital by showcasing their efforts to reduce climate risk.
It’s an adage, but sometimes when you’ve been working on something for a long time, things happen slowly and then all at once. That certainly applies here.
California is on the cusp of introducing mandatory climate disclosure to the U.S., but it will not be the last jurisdiction to require it from American businesses. New European Union regulations will go into effect next year and eventually apply to thousands of U.S. companies that operate overseas. Meanwhile, the U.S. Securities and Exchange Commission (SEC) is finalizing its own mandatory reporting standards for the nation’s publicly traded companies.
The work to get to this point has been painstaking. Back in 2003, Ceres organized a small group of institutional investors in the first public call for the SEC to address climate risk disclosure.
But momentum has only grown: in 2010, we mobilized investors to successfully petition the SEC to issue the first-ever guidance on corporate reporting of climate risks. And in the years since, it has become a mainstream and obvious point that climate risk is financial risk to business; investors need information to address it — and for the market to work efficiently. In 2022, more than 600 global investors with more than $40 trillion in assets under management called on governments around the world to require mandatory reporting standards.
Now California — a state whose reputation as a national climate leader precedes itself — has a chance to harness this momentum and bring the first policy of this kind to the U.S. Gov. Newsom should seize this opportunity to help protect investors, consumers, employees, communities, and the entire state economy from the clear risks of climate change by promptly signing this historic legislation.