In February, the U.S. Department of Labor (DOL) asked for public input on steps the Employee Benefits Security Administration (EBSA) could take “to protect the life savings and pensions of U.S. workers and families from the threats of climate-related financial risk.” TSC and B Lab U.S. and Canada submitted a response urging the ESBA to ensure that the plans it oversees are managed not just to account for the effect of climate-related risk on portfolio companies, but also the effect portfolio companies have on climate change. Our letter focused on two axes of investor-centered climate concern:

• Alpha v. beta: Investors’ climate-related financial risk can be divided between two value perspectives: (1) company-specific risks that potentially affect the relative performance of individual companies (“alpha”) and (2) systematic risks that potentially affect the performance of the markets as a whole, chiefly by threatening the performance of the global economy (“beta.”)
• Security selection v. stewardship: Investors have two primary methods by which to mitigate investment risk. Security selection helps to reduce alpha risk, whereas stewardship—when deployed correctly—helps to minimize beta risk. TSC favors the latter as a better tool for addressing diversified shareholders’ interests.

EBSA (and other investors) can deploy combinations of the two types of risk and two types of mitigation above to address climate-related threats. Our letter argues for a stewardship approach whereby investors engage with companies and vote their shares to push companies to end practices that, even if profitable for the company, threaten the economy and thus overall market returns.

In March, the U.S. Securities and Exchange Commission (SEC) proposed a new rule that would require companies to disclose some of their greenhouse gas emissions in a standardized way, and to explain to investors how climate change could affect companies’ financial performance. Elena Botella of the Omidyar Network (one of TSC’s primary funders) wrote an excellent piece for Forbes explaining the proposed rule.

The proposed rule focuses on “climate-related risks that are reasonably likely to have a material impact on [a company’s] business, results of operations, or financial condition.” Of course, this formulation excludes the risk companies impose on the broader economy and diversified portfolios when they externalize their environmental costs. TSC is preparing a comment letter that will urge the SEC to include diversified shareholders’ interests in the rule.