Financial regulators, international institutions, market participants, and others have been increasingly focusing on developing advanced tools to understand the implications of climate change for the financial sector and financial stability, particularly on open market operations and fiscal transparency of publicly traded corporations. Trustworthy information is the cornerstone of efficient markets. A transparent accounting of business operations is essential for understanding how risks arising from climate change may affect financial stability and the deepening of climate finance readiness. Investors and governments worldwide rely on publicly traded corporations’ disclosure reports when decerning where money should flow. To provide a much stronger foundation for corporations and markets, the U.S. Securities and Exchange Commission (SEC) proposed in early 2022 a new rule requiring publicly traded corporations to disclose their greenhouse gas (GHG) emissions and climate-related risks.
Climate finance readiness refers to processes, procedures, and strategies that help nations to enhance their capacity to plan, access, distribute, use and deliver financial resources for combating climate change in a transformative way. These strategies exist at regional, national and local levels and are needed to monitor and report the resource’s use and outcomes. Climate mitigation and adaptation measures are supported by local, national, or transnational funding derived from public, private, and other alternative funding sources. Opportunities for investments in climate-smart initiatives are provided through climate finance offered by a range of international, regional, and national partners.
Investors are increasingly directing significant attention to using climate-related risk disclosures to identify and pursue new business opportunities because some of these risks have already materialized. The proposed SEC rule and regulation would apply to nearly $82 trillion worth of securities trading that the SEC oversees annually on U.S. equity markets. Stockholders may be concerned about companies with high greenhouse gas emissions in their portfolios since climate risks are already substantial and are expected to grow. For example, in 2021 alone, businesses in the U.S. incurred nearly $145 billion in weather- and climate-related costs, according to the U.S. National Oceanic and Atmospheric Administration. Financial institutions, including the U.S. Federal Reserve System, are shifting their attention toward understanding possible transmission channels from climate-related risks to financial system vulnerabilities (see Figure 1).
Climate-related targets include reducing greenhouse gas emissions, energy efficiency measures, or ecosystem restoration. The SEC filing disclosure information would consist of interim targets. Descriptions of the range of activities and emissions had in the target, the unit of measurement, the defined time horizon for realizing the set goal, and the baseline emissions for gauging progress. The progress toward reaching these goals would be detailed, along with how it is accomplished, and any carbon offsets or renewable energy certificates used to achieve them analyzed. Climate change-related financial risks pose both micro and macroprudential concerns, presenting CEOs and policymakers with growing regulatory and market challenges to make the ambition of net zero a reality. One example is the significant investments that B2B corporations have made in back-office service centers in nations like India, where portions of the country may experience dangerously high heat and humidity levels in the coming years.
For years, businesses have followed wildly divergent climate risk disclosure approaches due to the opacity of exposures, mispricing of risks, and possible systematical correlation of risk exposures across participants in the economy and financial system. Energy economist Dr. Joseph Nyangon has assessed new frontiers in climate-related financial risk and regulatory analytics by applying advanced technologies like artificial intelligence, machine learning, IoT, and predictive analytics solutions. Dr. Nyangon works at the SAS Institute, where he advises energy companies on leveraging these technologies to address emerging challenges of grid modernization, electrification, decarbonization, and digitization. Dr. Nyangon is a non-resident fellow at the Colorado School of Mines’ Payne Institute for Public Policy and a research fellow at the Initiative for Sustainable Energy Policy of Johns Hopkins University’s School of Advanced International Studies (SAIS). He has a Ph.D., two master’s degrees, and an undergraduate degree in energy economics, public policy, engineering for energy systems, and computing systems from Columbia University, the University of Delaware, and the University of Greenwich, among other institutions.
An active member of the International Association for Energy Economics (IAEE), Institute for Operations Research and the Management Sciences (INFORMS), and a senior member of the Institute of Electrical and Electronics Engineers (IEEE), Dr. Nyangon has recently co-authored a paper titled: “American Policy Conflict in the Hothouse: Republican Cancel Politics and Polycentric Rebellion,” which postulates that a polycentric layer at the state and regional levels has continually created policies designed to overcome the national posture of climate policy inaction. He has examined and analyzed the energy sector’s technical, market and policy facets, including electricity generation, transmission, and distribution. His knowledge spans a wide range and constantly evolves, from using modern energy sources to adopting newer, cleaner sources and how this might benefit the globe.
It will be challenging to comprehend and address climate change’s threat to the financial sector and the global economy. It will take time and much learning to get this right. Research of specific interlinkages between climate-related risks and their associated hidden vulnerabilities in the financial sector is needed to understand better these risks to the economy. The risks associated with the climate are growing. This trend makes it crucial for the financial market to adopt advanced modeling methods and tools to price these risks to facilitate informed, accurate, and effective capital allocation decisions. Financial regulators and investors should embrace the new SEC’s climate-risk disclosure rule and regulation.
