Cities are on the frontlines of the fight against climate breakdown. They also wield significant financial influence by managing pension funds and other city-controlled investments. That’s why many cities are shifting their investment strategies toward more climate-conscious portfolios. The new rule adopted by the US Securities and Exchange Commission (SEC) increases transparency and accountability, allowing cities –and all investors– to make more informed decisions with their money.
It is clear that investments in the fossil fuel sector are increasingly financially risky, and any short-term gains in the sector have yet to make up for a decade of underperformance. In addition, companies without a plan to address the impacts of the climate crisis, from increased heat, precipitation, and drought to disruptions in supply chains, are ill-prepared to navigate and mitigate climate risks to their operations.
Cities, like many responsible investors, are concerned about how climate risk affects their investment portfolios and are driving a shift towards more sustainable options to protect against the risk, volatility, and underperformance of fossil fuel-heavy portfolios. Cities are also realising the potential to earn market-rate returns while helping to create good, green jobs and improve the health, wellbeing, and safety of their residents.
Unfortunately, too many companies have been ‘greenwashing’ their reports to investors, lacking transparency over how the climate crisis is affecting their operations and how they are managing this transition, and masking carbon-intensive operations in misleading eco-friendly terms. Further, a lack of regulation by the SEC has prevented standardisation that would allow investors to compare and contrast how companies handle climate-related financial risks and opportunities.
The rule change by the SEC creates more transparency and accountability, allowing cities and other investors to make informed decisions. It ensures that investors will have more information to shift their portfolios toward companies taking action to address their climate risks, as well as direct capital toward green investments. With the green economy booming, investors must have adequate information to grasp the opportunities presented by the transition to a clean energy future and manage the risks associated with continued fossil fuel reliance.
However, greater ambition is needed if companies are to disclose information across value chains that will adequately protect investors from misleading greenwashing statements and omissions and allow them to make informed decisions that support a climate-safe, just future for all. This includes crucial information on emissions, including Scope 3 emissions (the result of activities from assets not owned or controlled by the reporting organisation), which account for 70% of corporate value chain emissions, and ensuring companies have adequate guidance to uniformly analyse the materiality of Scope 1 (direct greenhouse gas emissions that occur from sources that are controlled or owned by an organisation) and Scope 2 emissions (indirect greenhouse emissions associated with the purchase of electricity, steam, heat, or cooling).
The rules represent a significant and long-awaited reporting framework for companies to report climate risks and opportunities and provide reliable, comparable information to help protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation. C40 welcomes the SEC’s measures and urges further action along this path to ensure the public has complete, comparable information about the climate risks of their investments across value chains.
LaToya Cantrell, Mayor of New Orleans, said: “Investing in clean energy and technologies is an investment in the health, safety and economic security of our City. New Orleans is using our financial power to create a more equitable and sustainable economy, including exploring high-yield sustainable investment funds. By ensuring that all companies play by the same rules and give information to consumers, the SEC is giving us the tools we need to make smart decisions.”
Justin Bibb, Mayor of Cleveland, said: “As a member of the SDSN Global Commission on Urban SDG Finance, I know that aligning the nation’s capital markets with our environmental and development goals is crucial. But we can only do that if we have clear and transparent disclosures that allow investors in corporate securities to assess a company’s climate-related risks and mitigation strategies. Last Wednesday’s SEC rule change is a good step forward to help investors in corporate securities invest in a safer, greener future.”