By Brian Deese & Jeff Zients
Even before the devastating flooding began in Louisiana last week, and we learned thatJuly 2016 shattered all global temperature records, mounting data had demonstrated the growing risks climate change poses to the global economy. Whether you are an investor assessing the $2 trillion in bonds that Moody’s found carry elevated near-term climate risk, one of the nearly two million U.S. homeowners facing significant risk from climate-related flooding, or a U.S. taxpayer staring at $360 billion in direct government costs from extreme weather over the past decade—these threats are looming, large and increasing.
This year’s World Economic Forum Global Risks Report declared the “failure of climate-change mitigation and adaptation” the “risk with the greatest potential impact in 2016.” Yet financial markets suffer from an alarming lack of standardized and comparable climate-risk information, which keeps investors and policy makers from accurately incorporating these risks into their decisions. Combating climate change requires not only leveraging bold action by governments to cut carbon pollution, but also harnessing the power of market forces with clear, uniformly disclosed assessments of climate-related economic risks.
This starts by changing the way the federal government does business. On Friday, the Federal Emergency Management Agency is proposing the first update to federal flood standards in 40 years. These needed changes will reduce the risks and costs of flood disasters, including lost lives and up to hundreds of millions in taxpayer dollars. In coming months, our Housing and Transportation Departments will issue similar, new standards.
Likewise, the administration recently proposed requiring that all companies doing business with the federal government publicly disclose what they know about their climate-risk exposure. This information will be a factor in taxpayer-funded contracting decisions. The administration is also working to increase disclosure of climate risks that America’s more than 140 million pension beneficiaries face in their investments. And we now require that our agencies consider and publicly disclose climate risk when undertaking other major federal actions, like leases of public resources, issuance of permits, and investment in infrastructure.
But to deliver sufficient impact, this effort must involve government and the private sector working together to develop assessments of climate risks as well. Such information is a prerequisite to effectively engaging consumers, investors and companies in the work of protecting the planet.
Here in the U.S., the Securities and Exchange Commission has already taken important steps to make clear that today’s climate risks can be financially material, which is necessary to trigger mandatory disclosure requirements. But shareholders are increasingly pushing management to be more attentive to climate risk. This proxy season alone, shareholders filed a record-setting 94 climate-related proposals at shareholder meetings of U.S. companies. And these proposals garnered majorities or near-majorities in several high-profile shareholder votes.
Clearly, more aggressive action is needed: The SEC could adopt detailed and standardized industry specific requirements for disclosure, and, once in place, aggressively hold public companies to account when it comes to those obligations to disclose. That will ensure that the market has the transparency and data it needs to efficiently price climate risk and to spur innovation that could ultimately decrease the magnitude of these risks across the economy.
This effort should also be extended internationally. The G-20’s Financial Stability Board has already charged a task force led by former New York City Mayor Michael Bloombergto develop recommendations on this very issue. At the coming G-20 meeting, the world’s major economies should reaffirm the importance of this work, and support the Task Force’s efforts to push in the direction of specific international disclosure standards.
The good news is there is a broad and growing bipartisan consensus for these types of aggressive actions, including from major global companies, former Republican and Democrat U.S. Treasury secretaries, and large institutional investors representing trillions of dollars in capital. Yet some Republicans in Congress continue to advocate for a strategy of keeping taxpayers and investors in the dark by preventing the government from updating flood standards or enforcing disclosure of common-sense information to the public.
The stakes for our economy are too high to stand still or move backward. This is the moment to accelerate efforts to understand, measure and standardize disclosure of climate risk and put that understanding to use. Doing so will help to secure long-term value for investors and taxpayers; improve market efficiency and stability; strengthen the resilience of our communities; and help the world combat climate change.
Mr. Deese is a senior adviser to President Obama. Mr. Zients is director of the White House’s National Economic Council.