New Report Finds SEC Must Mandate Climate Risk Disclosures in Wake of Deadly Texas Power Outages

(Washington, D.C. – June 15, 2021) The existing regulations administered by the Securities and Exchange Commission (SEC) did not provide investors or the public with vital information about the serious risks Texas power companies faced from climate change and extreme weather before this winter’s devastating power outages, according to a new report from Environmental Defense Fund and the Brookings Institution.

Winter storms that hit Texas in February caused power outages that lasted for days, led to the deaths of more than 150 people, and caused billions of dollars in damages. Experts at EDF and Brookings reviewed SEC filings of seven Texas companies – three publicly-traded power generators and four publicly-traded utilities – for their report, What Investors and the SEC Can Learn from the Texas Power Crises. They found that this year’s Texas power crisis was a foreseeable possibility, but that possibility – and increased risk from climate change in general – was not rigorously acknowledged in the companies’ financial disclosures.

“The problems that led to this year’s deadly blackouts were extreme, but they are not unique to Texas. The Securities and Exchange Commission must require better information if we’re going to protect people across America from future disasters, and that includes climate-related risk disclosures that don’t leave investors and communities in the dark,” said EDF Lead Counsel and Director of Climate Risk Strategies Michael Panfil. “We must prevent future tragedies like what occurred in Texas, and in order to do that we must act quickly to, among other things, strengthen our regulations for rigorous and reliable climate risk disclosure.”

“Scholars have been amassing evidence that financial markets know very little about how companies and municipalities are exposed to the physical impacts of climate change,” said David G. Victor, professor of innovation and public policy at the UC San Diego School of Global Policy and Strategy and nonresident senior fellow at the Brookings Institution. “Extreme events like what happened in Texas could become more common with climate change and offer a window into what firms are telling the markets about their physical exposure.”

What Investors and the SEC Can Learn from the Texas Power Crises analyzes the 10-K reports of the seven companies operating in the Texas power sector. The SEC requires public companies to file 10-Ks each year that disclose financial risks and plans to address them.

However, climate-related risks are often neglected compared to more traditional financial risks.

The report found that the 10-K reports of the Texas companies indicated serious weather events are unexpected, even though Texas has suffered through severe winter weather-related blackouts before. After cold temperatures caused electric failures in the state in 2011, the Federal Energy Regulatory Commission and North American Electric Reliability Commission urged power generators and utilities to winterize their operations. Since then, climate change made severe weather events more likely, and advances in climate science and risk analysis have made them easier to foresee.

The seven companies studied in What Investors and the SEC Can Learn from the Texas Power Crises largely relied on boiler-plate language in their 10-K filings, did not quantify potential future damages from extreme weather, did not examine the potential that events like the blackouts could become more frequent and severe due to climate change, and did not outline potential plans to manage future extreme weather events.

The report found “consistent underreporting of climate-related risks” from the companies which has resulted in investors, suppliers, customers, and the public receiving information that is “generic and of essentially no value.”

The report concludes:

“We find that although extreme weather events endanger human life, devastate families and communities, and upend business operations and critical services, as manifested in the February 2021 Crisis, prior to the crisis companies did not provide investors with the information needed to evaluate firms’ exposure to the event and its associated risks.”

The report found that the SEC must mandate climate risk disclosures that are rigorous and reliable to elicit a full and transparent accounting of climate-related risks. Specifically, the report recommends the SEC:

• Require disclosure of relevant climate-related information needed to make informed business decisions.
• Recognize that the current system of voluntary disclosure is insufficient, and make climate risk disclosure mandatory.
• Align disclosure requirements with advances in climate science.

The report was cited by the new Initiative on Climate Risk and Resilience Law (ICRRL) in its debut filing with the SEC. It is part of Brookings’s Markets at Risk project which has explored how climate change is affecting financial markets. You can read the entire report here and the appendix here.