Duke report: Lack of climate risk disclosure mandate threatens financial stability
The report from the Duke Climate Risk Disclosure Lab warns that financial markets are exposed to the downstream effects of climate change due to lack of disclosure requirements.
A new report by the Climate Risk Disclosure Lab at Duke University assesses the threat that the lack of climate-related information in corporate disclosures poses to financial markets and the broader economy. The report, Climate Risk Disclosures & Practices, warns of the failure of U.S. regulators to properly incorporate climate change into their mandates and calls for action to stem the systemic threat that climate change poses to the stability of the U.S. financial system and the American economy.
The Climate Risk Disclosure Lab is a partnership between Duke Law’s Global Financial Markets Center (GFMC), Duke’s Nicholas Institute for Environmental Policy Solutions, and the National Whistleblower Center.
“The report makes clear that U.S. regulators must act to implement a thorough, robust, and mandatory disclosure framework for climate-related information,” said Lee Reiners, the report’s lead author and executive director of the GFMC.
“Such a regime is needed to ensure that firms assess and measure climate-related risks and opportunities, and that they transmit that information to financial markets in a comparable and decision-useful way.”
“Corporations face enormous risks from climate change, including severe weather events such as hurricanes, tornadoes, and flooding that can have immediate destructive effects on physical assets, infrastructure, and supply chains,” Reiners said. Climate change and weather events also can cause long-term disruptive effects on global financial markets, while the transition away from fossil fuels could render industries and business models obsolete and cause hundreds of billions of dollars in assets to be stranded.
Companies and investors need to be aware of these risks, yet the U.S. lacks both a standardized framework for climate-related disclosure and an effective enforcement mechanism to hold companies accountable for failing to disclose material climate risks, he said.
Because of inadequate disclosure requirements, companies are not consistently identifying, measuring, and communicating climate-related risks, the report states. As a result, investors, firms, stakeholders, and policymakers do not have the information needed to adapt to the inevitable consequences of climate change, and financial markets remain vulnerable to abrupt climate-related shocks.
Climate Risk Disclosures & Practices begins by outlining the importance of climate-risk disclosure for investors, firms, and financial markets. It then details the failure of U.S. regulators to implement climate risks into their mandates which contributes to inadequate disclosure of climate-related information. Finally, the report assesses the market, legal, and regulatory factors that are driving improvements in disclosure practices and explores the future of climate disclosure.
According to the report, mandating the disclosure of climate-related information would have such broad market benefits as: increasing investor ability to compare companies and promote more efficient allocations of capital; ensuring that firms identify adaptation measures and emerging opportunities and enabling them to share that information with stakeholders under a common and accessible framework; facilitating more confident long-term investments and accurate asset pricing; and creating more sustainable companies and economies.
The report is the first issued by the CRDL, which launched in July 2020 to improve transparency and accountability in corporate reporting of climate-related risks and support those working to address the threats climate change poses to the stability of the global financial system, including corporate whistleblowers.