Banking Crisis Response Should Inform SEC Climate Disclosure Rule

In designing its climate risk disclosure rule, the Securities Exchange Commission has already evaluated banks’ recent disclosures of climate risks. But the agency might not realize what’s missing from these disclosures. Here is where investors can help.

After watching one major bank after another commit to Paris Agreement goals to reduce emissions, and then continue large-scale financing of fossil fuel expansion, investors at recent bank annual meetings voiced concerns about empty promises. They flagged comments from key regulators such as the Federal Reserve, which found in a recent study that most restrictions systemically important global banks deploy for high-emission activities appear “symbolic, seemingly to avoid reputational damage.”

At four of this year’s US bank annual meetings, investors filed shareholder resolutions calling upon management to explain how they plan to meet their stated emissions reduction goals. Despite strong opposition from management, and the general tendency of investors to follow management’s lead, the results were quite illuminating.

Support for transition plan disclosure ranged from 35% at JPMorgan Chase to 28.5% at Bank of America, with Goldman Sachs and Wells Fargo falling in between. These results represent significant investor support, especially for proposals filed for the first time.

After the failures of Silicon Valley Bank, Signature Bank, and First Republic, SEC action on bank climate risk disclosure can’t come soon enough.

More information about bank transition plans is sorely needed if investors are to accurately assess how effectively these financial institutions manage their risk exposure. Offering loans to fossil-fuel companies poses significant risks to banks.

The economy is rapidly shifting toward low-carbon fuel sources, greatly increasing the risk of stranded fossil-fuel assets. Bank portfolios are a significant part of the $1 trillion to $4 trillion carbon bubble that financial experts worry could rapidly deflate, leading to a global financial crash, if a shift away from fossil fuels isn’t executed in a timely manner.

In 2021, the Financial Stability Oversight Council found that businesses, financial institutions, investors, and households are at risk of financial harm due to failure to prepare for decarbonization of the economy, or transition risk.

The FSOC also expressed concern about failure to prepare for climate change’s physical impacts, or physical risk, noting that the economic costs of climate-related disasters are already substantial and increasing. Studies suggest that failing to take steps to mitigate the impacts of climate change could reduce global economic output 25% in the next two decades, and substantially lower equity returns.

The FSOC has recommended that the SEC issue a climate risk disclosure rule. Unfortunately, although the SEC proposed a strong rule in March 2022, the rule hasn’t yet been finalized, apparently due to substantial opposition from fossil-fuel interests.

Meanwhile, climate risk has continued to grow. US banks and asset managers consistently pour vast sums into expansion of the fossil-fuel industry, worsening both physical and transition risk. Recent bank failures and growing concerns about financial instability necessitate greater regulation of climate risk.

The SEC’s rule if finalized would provide investors with critical information about a company’s readiness to capitalize on the enormous opportunities associated with the transition. Investors would be able to evaluate the impact of climate risk and opportunities on business operations in audited financial statements, a critical step for evaluating a company’s prospects in a warming world.

Disclosures would be standardized, so that investors can easily compare companies’ capital expenditures toward the transition and their annual greenhouse emissions.

Unlike its European counterparts, the SEC’s proposed rule doesn’t require companies to adopt plans to move toward targets aligned with the goals of the Paris Agreement. But if a reporting company does have an emissions reduction target—as is the case with virtually every major US bank—then it must disclose its plans for achieving that target and metrics for evaluating progress.

Nearly one-third of investors voted in favor of transition plan disclosure proposals at big US banks. This significant level of support should show these financial institutions that they can no longer make climate commitments without disclosing their plans to see those commitments through. The SEC should take note of these increasing investor demands and quickly finalize its rule to meet an urgent need.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

John Kostyack is an adviser to the Sierra Club and other nonprofits and foundations that promote sustainable investing.

Jessye Waxman is the senior campaign representative for the Sierra Club’s Fossil-Free Finance campaign. Waxman has extensive experience in shareholder advocacy on climate and environmental issues.

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