Impax Asset Management, the UK sustainability focused firm with £18.1bn (€19.9bn) in assets under management, has asked the US financial regulator to amend corporate disclosure rules so that investors can know the physical climate change risks companies face.
It is hoping that other investors will support the move.
It's in the context of three current US Securities and Exchange Commission (SEC) commissioners are opposed to mandating further ESG disclosures, especially Commissioner Hester Peirce, who has been vocal in her disparagement of such non-financial data. Only Commissioner Allison Herren Lee has voiced her support. The Commission is also unresponsive to its own Investor Advisory Committee which has called, several times, for mandated disclosure.
So, in order to move the debate on, Impax has taken the step of requesting a single additional set of disclosures.
In a rulemaking petition, the form used to ask the SEC to make specific amendments or additions to existing rules, Impax has asked the Commission to amend Regulation S-K to require “that companies identify the specific locations of their significant assets, so that investors, analysts and financial markets can do a better job assessing the physical risks companies face related to climate change.”
Regulation S-K is a regulation under the Securities Act that lays out reporting requirements for listed companies.
While recognising that there might be some disagreement over other types of climate-related risks, the petition continues, physical risks are clear and undeniable and “can happen to any enterprise, and depend not on emissions but on where the company operates, and where the major facilities are in its value chain. This is why investors need more precise physical location data from companies than most now provide.”
Citing a number of recent papers and research outlining physical risk among others, the petition notes that the CDP recently reported that “215 of the world’s largest companies report that they see almost $1 trillion in value at risk from climate change within the next five years”.
Regulation S-K already requires the disclosure of material risks posed by climate change, but it does not require the physical location of facilities to be disclosed.
In an email to RI, Joe Keefe, Impax’s president said: “Sea level rise, storm surges, wild fires and other extreme weather events fueled by climate change can affect different companies in different ways depending on where their facilities are located. Physical risk is something that companies need to be increasingly concerned about.
Keefe, who joined the firm when it acquired Pax World in 2018, added: "It seems to me elemental – and not at all onerous – that companies be required to disclose their physical locations as this information could be highly relevant to analysts and investors assessing how companies are managing and building resiliency in the face of climate risks. That’s why we filed a Petition for Rulemaking with the SEC and that’s why I am hoping that other investors, asset managers and interested NGOs will support our petition.”
Julie Gorte, SVP of Sustainable Investing at Impax, added: “We decided to file this petition after assessing climate physical risk for several of Impax’s portfolios.
“What we found, in the process, that simple location data was a far larger hurdle than we expected. We knew we were going to have to have a climate scientist, who could assess the increase in risk of various physical impacts in the future, based on what the climate models in CMIP 5 are saying [Coupled Model Intercomparison Project], and it is a suite of different climate models addressing various aspects of climate’s physical impact. We have that. We also knew we were going to have to downscale the models, because the resolution of many of them is on the order of 1-2 degrees of arc, or approximately 100-200 kilometers.”
She described how difficult it was simply obtaining the physical locations of companies’ significant facilities. “As we pointed out in the petition, the difference of a few miles can often make the difference between being very vulnerable to something like sea level rise and storm surge from coastal storms, and being relatively protected.”
Gorte added that there is no requirement to report physical locations with the precision that physical risk assessment needs, though it would not be difficult for them to do so. Street address, or better, longitude and latitude would not be hard, and if vague locations are reported it is more likely that investors will either over or underestimate physical risk, neither of which is helpful.
“We have had a few company dialogues to ask for more data,” wrote Gorte, “and we have found that the companies themselves are often as interested as we are in the results of the physical impact assessment.” Like Keefe, Gorte stressed a hope that other investors and stakeholder support the petition, “as it’s in the interest of the kind of information disclosure that makes financial markets more efficient”.
Corporations, investors and advisers, in fact, any person can file a rulemaking petition. While the SEC would not comment on this specific petition – Impax’s was submitted on June 10 – it said petitions are "forwarded to the appropriate office or division" of the SEC for "consideration and recommendation".