The academic literature calls each of these assumptions into question.
For instance, in a 2020 Review of Financial Studies article, Philipp Krueger, Zacharias Sautner, and Laura Starks conducted what is perhaps the most comprehensive survey of institutional investors’ interest in climate-related risk disclosure. Their sampling is deliberately biased toward investors who care about climate risk and are pessimistic about the effect of climate change.
They ask respondents to rank six risks: financial risk, operating risk, governance risk, social risk, climate risk, and other environmental risks. Climate risk and environmental risks rank fifth and sixth, suggesting that these risks are not viewed by even climate-sensitive investors as on par with the more traditional information in mandated disclosures. Likewise, the most common reasons given for considering climate risk—reputation and moral/ethical—have little to do with the typical return–risk assessment entrusted to professional investors.
Several papers suggest that the capital markets already price in climate-related risks. A 2017 Contemporary Accounting Research article by Paul Griffin, David Lont, and Estelle Sun gathers information from voluntary disclosers’ involvement with the Climate Disclosure Project to model the risk faced by non-disclosers. The authors find that the market discounts equity valuations of the non-disclosers slightly more than that of the disclosers, and that the non-discloser discount is only about 0.5% of market capitalization.
A 2021 Journal of Financial Economics article by Patrick Bolton and Marcin Kacperczyk finds that stocks of firms with higher emissions and higher changes in emissions earn higher returns than low-emission firms. They note that this “carbon premium” did not exist in the 1990s.
In a 2021 Review of Financial Studies article, Emirhan Ilhan, Zacharias Sautner, and Grigory Vilkov find that uncertainty about regulatory climate risk is priced in the option market, with volatilities higher for large carbon-emitting firms. This volatility premium varies with the political environment, suggesting that much of the market’s assessment of climate-related risk is legal liability risk versus operational risk.
Academic studies also conclude that the debt market is currently capable of assessing and pricing climate-related risks. A 2019 working paper by Manthos Delis, Kathrin de Greiff, and Steven Ongen finds that, after the 2015 Paris Accords in which most of the world’s nations agreed to limit carbon emissions, the interest rate on syndicated loans for fossil fuel industries has been higher than other industries with similar non-climate risks. A 2020 Journal of Financial Economics article by Marcus Painter finds that firms located in counties more likely to be affected by climate change pay higher debt underwriting fees and initially sell for higher yields than bonds issued by firms less exposed to climate change. In a 2020 working paper, Lee Seltzer, Laura Starks, and Qifei Zhu find that firms with poor environmental profiles and high carbon footprints receive lower credit ratings and pay higher rates.
Finally, there is evidence that companies have a market incentive to disclose climate-related risks voluntarily. In a 2016 Journal of Business, Finance and Accounting article, Andrea Liesen, Frank Figge, Andreas Hoepner, and Dennis Patten find that voluntary disclosure via the Carbon Disclosure Project is value relevant. Firms with complete carbon emissions reporting earn excess returns over those that do not. Thus, in a world where the market rewards voluntary disclosure, it is unclear whether mandatory disclosure is needed.
Conclusion / There is considerable evidence that the current voluntary principles-based disclosure regime, where companies report climate-related risk if they view it as material, works well and that financial markets can assess climate risks from available information and enforce financial penalties. By relying on the capital markets to incentivize disclosure via demonstrated discounts in market valuations of non-disclosing firms, the SEC can rely on market forces to achieve its disclosure goals.
