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. 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 and B Lab U.S. and Canada submitted a comment letter on the proposed rule explaining why climate disclosure needs to focus on economy-wide impacts of company behavior, not just on how climate change affects company performance. 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 directly impacts on portfolio performance by determining what securities are in a portfolio; the extent to which security selection can be a tool to influence beta is less clear. Stewardship—voting and engaging with companies already in an investor’s portfolio in order to change their behavior—can be a wielded as tool with an intent to drive either alpha or beta.

As proposed, the rule is designed to assist investors in driving alpha, either through security selection or stewardship. Our letter argues for a disclosure framework that would also support a beta 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. We believe that without an effective beta-stewardship approach, the drive for individual company financial performance will continue to drive climate risk. An alpha-centered investment thesis is simply not viable in the face of the climate threat.