Virtual Remarks at the Center for American Progress and Sierra Club: Down the Rabbit Hole of Climate Pledges

Thank you Daniella [Gibbs Léger], I am thrilled to be here today. And I want to commend the Center for American Progress and the Sierra Club for the hard work and dedication behind the important research that is being recognized today. Climate change is a crisis that poses an existential threat to our society, and our capital markets will not escape the impact.[1] But before I continue, I must give my standard disclaimer that the views I express are my own and do not necessarily reflect the views of the Commission or its staff.

Net-Zero Pledges

In my role at the Securities and Exchange Commission, my staff and I monitor corporate disclosures and announcements. In other words, like you all, I pay attention to what companies are saying both to the SEC, but also publicly on their website or on social media. In the months and days leading up to COP26, I noted, in particular, many public companies announcing net-zero emission pledges.[2] In fact, recent data show a significant percentage of publicly traded companies around the world have committed to a net-zero strategy.[3] This is, ostensibly, good news. Yet, when I dig a bit deeper, it is sometimes unclear to me how companies will achieve these goals.[4] Nor is it clear that companies will provide investors with the information they need to assess the merits of these pledges and monitor their implementation over time.[5] Investors have noted the importance of understanding how the pledges are being implemented this year, 5 years from now, and 10 years from now; rather than simply waiting to see if, 30 years from now, the goal of net-zero emissions comes to fruition.[6] That is too late. So while net-zero emissions pledges are an important step forward, they underscore the loud, repeated, and sustained calls for decision-useful metrics – metrics calculated using reliable and comparable methodologies that enable investors to decide whether the companies mean what they say.[7] That is a core purpose of the SEC’s disclosure obligations.[8]

In thinking about corporate disclosures, net-zero pledges implicate several other important issues. One in particular is political spending. Without disclosures on political spending, executives may spend shareholder money in ways that contradict their public commitments and statements. After the Paris Climate Accords, a number of public companies went on the record in support of the Accords. However, questions remain about whether those companies continue to make political contributions that support opposition to the Accords.[9] And this is just one example.[10] A majority of American shareholders acknowledge that corporate political spending is done at the behest of the executive’s interests, rather than for investors.[11] With that level of investor support and repeated calls to action from academics,[12] policymakers,[13] and experts,[14]  it is an issue that should be addressed.[15] 

Accurate and reliable climate metrics are not only important for investors’ evaluation of sustainability efforts or how companies are spending shareholder money on politics, it is also critical for assessing fundamental and traditional corporate governance matters, like executive compensation. Recent surveys indicate that more executive compensation is being linked to “sustainability performance.”[16] Linking executive pay to achieving ESG or sustainability-related goals can be a positive alignment of incentives. However, without reliable and consistent disclosures about those ESG targets, I wonder whether investors and Boards have the tools to accurately assess if such targets have been met and if that alignment between executive pay and ESG targets has been achieved.

Given these concerns, among others, I am pleased the SEC currently has a climate change disclosure rulemaking on our regulatory agenda. Commissioner Allison Lee, who was then acting Chair, opened a request for information earlier this year that has yielded valuable and important data and input from the public. As I reviewed that comment file with my staff, it became clear that there is significant investor demand for comparable, reliable, and decision-useful climate disclosures. Investors and market participants understand that climate risk poses a threat that is profoundly impacting our capital markets today and will continue to do so in the future. As the SEC advances this rulemaking, it is critical that you engage with us and provide us with the detailed, evidence driven, and well-reasoned research you have produced here today. The staff of the SEC are some of the most dedicated and exceptional experts I have had the privilege to work with. And to help us meet our obligations under the rulemaking process, they consider and grapple with data submitted to the comment file, including submissions like your research.[17] The more detailed and data driven the rationale that undergirds a policy position the more calibrated and meaningful our policies will be. 

Private Markets

Finally, while the importance of disclosure in the public markets cannot be overstated, the lack of similar information in the private markets poses its own obstacles. There is no doubt that America’s public markets are the deepest, most liquid, and most dynamic in the world. And the widespread participation in and reliance on them speaks for itself. That being said, private markets are a reality of our financial system and one into which the SEC has significantly less visibility.[18] As you work on and advocate for policy to encourage divestment from carbon intensive activity, it is critical to consider the growing expansion of the private markets and where the capital that fuels those markets originates.[19]   

The SEC has its work cut out for it as well. We should consider the tools we have at our disposal to address these concerns.[20] However, it is possible that we do not have everything we will need.[21] Historically, Congress has acted when the opacity of the private markets turns into darkness.[22]

As we all work to shine a light on these risks to our financial system and formulate plans to address them, we should also work to ensure that the externalities high-carbon emitters put on our environment and in our capital markets do not find relative safe haven in areas of darkness, least resistance, and lowest cost.

I want to thank you again for having me and for your tireless and committed work.