Climate Change, Corporate Disclosure, and Financial Risk

Since Mark Carney’s Lloyds of London speech on the “tragedy of the horizon” and the formation of the Financial Stability Board’s “Task Force on Climate-Related Financial Disclosure” (TCFD) in 2015, mainstream members of the financial sector have come to recognize the importance of climate change to corporate risk management, disclosure, and investment decisions. The private sector has improved its understanding of how efforts to transition to a lower carbon economy, the physical consequences of a changing climate will impact the economy, and the role that industry plays in mitigating and adapting to climate change. The financial sector is grappling with how to understand and account for such risks in investment, lending, and other financial decision-making. Regulators are considering how these risks affect markets and the economy as a whole. 

The US is entering a new era in this discussion — one in which our financial regulators move from researching climate change to acting to address its impacts. After years of sitting on the sidelines as companies and investors talked about how to consider climate change in their work and financial regulators in other countries began to address the issue, federal financial regulators (and some state regulators) are beginning to make a mark. 

Since 2018, EELP has studied the legal questions that arise as climate change impacts become more apparent to companies and investors alike. We’ve analyzed how the state of the law has shifted as reasonable investors incorporate climate change information into their decision making and are closely following developments to provide sound legal analysis that will influence and make sense of regulatory choices.

Find important resources to help you keep up with this rapidly changing area of law and our expert analysis below. Contact us to be connected to our lead in this area, Staff Attorney Hana Vizcarra.

Return to our Private Sector Governance and Innovation Project page for more work on corporate response to climate change and the legal and regulatory topics that shape it.

Financial Regulators Addressing Climate Change

Until recently, US financial regulators have largely taken a wait-and-see approach to considering climate change impacts in their work. Securities regulators did not attempt to resolve the corporate disclosure confusion created by the melee of voluntary standards and disclosure efforts and regulators responsible for risks to the financial system quietly researched the impacts of climate change without taking any significant steps towards action. During the Trump administration, different federal entities took distinct approaches, ranging from research and consideration to actively erecting barriers against incorporating climate change concerns into decision-making. (See a summary of these actions in Staff Attorney Hana Vizcarra’s short piece from February 2021 describing the state of play at the end of the Trump administration, available here.)

President Biden has committed to taking bold actions on climate change, including in the financial sector and on corporate disclosure requirements. New leadership has already resulted in significant shifts in regulatory direction at both independent regulators and agencies more directly controlled by the administration. The Securities and Exchange Commission has announced new enforcement, examination, and regulatory initiatives designed to better address material climate-related information and oversight of ESG funds. Likewise, actions at the Commodity Futures Trading Commission, Office of the Comptroller of the Currency, and the Department of Labor’s Employee Benefits Security Administration signal a new approach. The Federal Reserve has also moved from a position of quiet, internal study, to public discussion and action. 

At EELP, we are closely watching these developments for how they interact with the law and what they mean for better incorporation of the impacts of climate change into financial and corporate risk management, disclosure, and the overall health of our economic system.

To help us, and you, follow these developments, we have created a Financial Regulator Climate Action Tracker. View our Financial Regulator Climate Action Tracker to stay up to date.

Evolution of Investor and Bank Use of Climate Change Information

Companies must navigate competing voluntary disclosure regimes for climate-related information, designed for different purposes, that operate under different assumptions, and request different information in distinct formats. While there has been some consolidation among existing standards organizations, there are still a multiplicity of players. This state of affairs has created widespread confusion, dissatisfaction, and churn, intensifying the call for regulatory intervention. 

But even without regulatory intervention, the state of the law has changed. Companies are doing a better job of analyzing the transition and physical risks of climate change that are relevant to their operations and new data and information at more detailed levels changes the scope of information they and the investment community have to work with. As investors ask for more detailed and expansive disclosures on climate risks and opportunities from companies and actually utilize that information in their investment decision making, it changes what must be disclosed under US securities law.  

Read about how the evolution in disclosure and use of climate-related information shifts the standard of what is “material” for the purposes of required disclosures in Hana Vizcarra’s article published in the Environmental Law Reporter in February 2020: The Reasonable Investor and Climate-Related Information: Changing Expectations for Financial Disclosures. See our other publications on this and related topics in the Publications, Presentations, & Podcasts list below.

As the financial community becomes more attuned to climate change and its risks — from asset owners, asset managers, and lenders to proxy advisors and ratings organizations — their expectations for the information needed to evaluate risks at the portfolio or company level change. We have seen expectations shift rapidly since the formation of the TCFD in 2015. 

See our Timeline of Investor and Bank Use of Climate Information for more detail on how climate-related practices and policies have changed at financial entities in recent years.

Publications, Presentations, & Podcasts