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How the SEC can protect investors, companies, and the public from another Texas power crisis

The Securities and Exchange Commission (SEC) is considering making important changes in disclosure requirements to reflect the growing recognition that climate change poses significant risks to the U.S. financial system.

This week, hundreds of investors, companies, and concerned Americans responded to the SEC’s request for public input on climate change disclosure.
Recent Brookings analysis co-authored by one of us on the intersection of climate change and financial markets has shown that a significant blind spot for financial institutions is how the physical impacts of a warming world affects assets. But, outside of insurance, relatively little has been said about financial vulnerabilities stemming from extreme weather.
The massive storm that hit Texas in February — known as Winter Storm Uri — highlights the dangers of ignoring the physical risks of climate change. Frigid temperatures and ensuing blackouts led to the deaths of more than 150 people and caused billions of dollars in damages. The blackouts also disrupted dozens of public companies, hundreds of small businesses, and millions of lives, raising a slew of questions for public officials.
In our new report, we focus on one of those questions: What did the financial markets know about the odds and impacts of a storm like this before it happened? Our report looks at SEC regulatory disclosures made by publicly-traded electric utilities and suppliers in Texas, and offers a clear answer: not much.
Even though Winter Storm Uri was foreseeable, and many firms, to varied degrees, had weatherization plans, existing SEC disclosure requirements did not elicit filings that conveyed the good, the bad, and the ugly in preparedness by utilities, power generators, and regulators. The tragic events set in motion by Uri highlight the need for significant improvement. Part of that improvement should come in the form of SEC rules that mandate the disclosure of specific and decision-useful climate information, built on the Task Force on Climate-related Financial Disclosure (TCFD) framework and aligned with leading climate science. Better climate disclosures can help investors analyze, manage, and price climate risk, which can in turn enable companies to embrace further climate resilience measures and therefore mitigate the destruction of extreme events like Winter Storm Uri.
The foreseeability of Winter Storm Uri
To analyze investors’ ability to incorporate the risk of an event like Winter Storm Uri into decisionmaking, we reviewed the 10-K reports of seven companies operating in the Texas power sector: three publicly-traded power generators and four publicly-traded utilities. The SEC requires public companies to file 10-Ks annually to provide investors and the market with details on corporate financial performance. 10-Ks undergird investment decisionmaking and are the bedrock of financial risk evaluation. Because climate change presents clear financial risks to companies, we would expect discussion of climate-related risks to appear in 10-Ks, no different from traditional financial risks. However, they rarely do.
Texas power generators and utilities, in particular, have good reason to address climate-related physical risks in their 10-Ks given both past encounters with extreme weather and increasingly sophisticated climate science and risk modeling available to the electric sector. In 2019, Texas accounted for seven of the United States’ 14 billion-dollar weather and climate disasters. In 2017, Texas faced significant power outages due to torrential rain and intense winds from Hurricane Harvey. In 2011, cold temperatures caused electric failures that impacted 3.2 million Texans, prompting the Federal Energy Regulatory Commission and North American Electric Reliability Commission to issue a report calling for Southwestern power generators and utilities to winterize their operations.
Based on those past environmental disasters and existing climate science, the increased intensity and frequency of extreme weather events like Winter Storm Uri are increasingly knowable to companies, with a level of uncertainty common for many financial risks.
The existing disclosure regime failed to prepare investors for Winter Storm Uri
Despite this foreseeability, existing SEC regulations did not elicit company submissions of specific, useful physical risk information in reviewed 10-K reports. Limited risk disclosures in turn undermine investor decisionmaking and overall market function.
Our research found that 10-Ks considered extreme weather, but only in vague ways — with little connection to impacts of and preparedness for events like Winter Storm Uri. More concerning, 10-Ks framed the freeze as a rare, point-in-time event unlikely to recur. With climate change, however, such events could plausibly become more common or extreme or both.
Moreover, although Winter Storm Uri caused billions of dollars in damage, reviewed 10-Ks were barely altered from previous years, with disclosure practices between 2020 and 2021 near-mirror images of each other. For instance, only 3% of words differed between the 2021 and 2020 climate-related physical risk sections of one major power company’s 10-Ks.

The need to strengthen SEC regulation is made particularly apparent by recent advances in climate science and risk analysis. The SEC should consider, for example, that many firms currently have access not only to large-scale climate models but downscaled projections that indicate company-specific and even asset-specific risks. Consolidated Edison, for example, undertook a Climate Vulnerability Study in 2019 that helped the utility estimate specific climate vulnerabilities. With these tools, companies can learn a lot about their physical risk exposure from year to year, especially after facing extreme weather.
Our finding that 10-Ks failed to incorporate new insights and learning reveals a concerning trend: Current SEC rules do not ask companies to remember key lessons from past weather events nor imagine the potential future impacts of climate change on their businesses. Companies’ collective inability to provide dynamic, useful information to investors highlights the need for new disclosure regulation.
How the SEC can protect investors from future extreme weather events
While we look, in our study, at individual companies, what’s clear is that thin disclosures are an industry-wide phenomenon. Companies’ sparse 10-Ks reflect widespread practices for disclosure, and that’s why the SEC needs to act. Through updated rulemaking, the SEC can help ensure that investors and others are prepared for extreme weather events.
Based on our findings, we encourage the SEC to:

Require the disclosure of climate-related information that investors and other market participants need to make informed business decisions. Winter Storm Uri shows that existing voluntary disclosure practices do not provide investors with sufficient climate risk information.
Make mandatory and build on the TCFD framework, recognizing that the current voluntary standards do not ensure specific, decision-useful climate disclosure. Because both TCFD-aligned and non-TCFD-aligned companies in Texas failed to disclose adequate climate information, we believe that SEC regulation should not rely entirely on the TCFD to yield improved disclosure practices.
Align disclosure requirements with advances in climate science and risk analysis. To ensure that companies imagine the forward-looking ramifications of climate change on their business, disclosure guidelines should keep pace with both macro climate science and more micro innovations in climate risk analysis, both of which continue to evolve.

At last, it seems, the U.S. is getting a lot more serious about climate change. Part of the policy answer lies with the SEC — requiring the disclosure of needed climate information to improve capital allocation and avoid inefficient, and in some cases deadly, market instabilities. Updating disclosure rules to protect investors, companies, and the public is long overdue.

Ensuring the durability of local commitments to the SDGs

The long-term horizon of the Sustainable Development Goals (SDGs) poses a challenge to any elected government since their achievement depends on sustained efforts across multiple election cycles. While municipal governments and mayors across the world voluntarily demonstrate significant leadership on sustainable development, they face special challenges in advancing progress, as their policy choices are often more constrained and their internal capacity more limited than national counterparts. As a result, for example, many U.S. cities have made limited progress on their climate change pledges. The expectations for a quick and sure economic recovery from COVID-19 add additional pressure to rebalance local priorities in favor of short-term growth at the expense of considering long-term consequences.
As cities seek to consolidate and institutionalize longer-term commitments to the SDGs, several common approaches are beginning to emerge.
1. Some cities are turning to resolutions and other political mandates to secure the SDG agenda across political cycles.
In some instances, mutually reinforcing policy objectives between the national and local governments normalize aspirations, enabling them to persist. In Mexico City, consistent sustainability objectives have been mainstreamed over 20 years in the city’s development plans, reinforced by the country’s constitutional mandate to “foster sustainable development.”

More commonly, however, local elected officials are turning to their legislative power to set a long-term footprint. Based on a local law, New York institutionalized the creation of a city strategy with mandates for regular public reporting. In 2015, it aligned that strategy, OneNYC, to the SDGs, and now its reporting—through the Voluntary Local Reviews (VLRs) that it pioneered—has become integrated with that mandate.
While they do not constitute a similarly strong accountability tool, a nonbinding resolution voted by the city council can provide several degrees of long-term credibility. Such resolutions signal to constituents and partners an alignment among city council members on key aspirations and priorities. They also provide “political cover” and an opportunity for civil servants to pursue more targeted strategies and integrate the considerations of the SDGs more fully into their work. Civil servants working on the SDGs often develop a city council strategy to get a vote on a resolution. In Madrid, a useful approach to secure this political buy-in while avoiding over-politicization has been to combine internal efforts within the city council with an acknowledgement of the benefits of integrating the city’s SDG strategy with the national recovery and spending plans.
These nonbinding resolutions also offer an entry point to securing wider buy-in from different partners and stakeholders in the community. The more partners co-brand these goals, the more “culturally appropriate” they become. For instance, Orlando’s updated sustainability and resilience plan (Green Works CSAP) co-branded with the SDGs, and was the first attempt to align the global goals with local priorities and take advantage of existing local awareness. It led to a 2018 resolution with specific clauses linking to the SDGs. The leadership of the city government helped create momentum, with other local institutions incorporating or referencing the SDGs in their strategies and activities: local universities (UCF GEEO center), neighboring city and county governments (Regional Resilience Collaborative), and a local philanthropic foundation (Thrive Central Florida). In other cases, nongovernment actors demonstrate more advanced leadership than the local governments, and their efforts catalyze and inspire municipal action, creating new norms and expectations.
2. New models of governance spurred by the SDGs can create “facts on the ground” that make it more likely to sustain efforts over time.
Cities use structures of governance as a means of institutionalizing the SDGs. Through the Bristol OneCity governance structure, city leaders have formed habits and created partnerships across sectors to strategize and lead together on city priorities. Regular stakeholder gatherings using the SDG framework led to city structures that facilitate collaboration, communication, and information-sharing on a collective set of priorities. While the city’s SDG plan remains associated with the mayor’s priorities, the system of strategy development and implementation, which has included the creation and leadership of six multistakeholder City Boards to drive the achievement of the local goals, will be harder to deconstruct. As the SDGs permeate local partnerships among local organizations and enable the leadership and contributions of this influential set of local stakeholders, a succeeding mayor will face political risk in dismantling these governance structures.
Demonstrating the nonpartisan dimension of equity and sustainability goals can help maintain them. In Bogota, the integration of the SDGs and climate goals by key government offices allowed the incumbent administration to maintain previous plans and efforts. Meanwhile, Pittsburgh has aligned its OnePGH city plan to the SDGs, reinforcing its long-term commitment to equity through the establishment of equity indicators measuring progress and securing investment commitments from local nonprofits to advance its initiatives. These arrangements will soon face a stress test as their mayor transitions.
3. Integrating the SDGs into regular city decisionmaking processes, such as the budgetary process, can also enable consistency.
The process by which cities make decisions on allocating their resources and public spending is a powerful tool to advance progress on the SDGs and make them an integral function of the city’s action. During and exiting the COVID-19 crisis, decisions over priorities will have important effects on the recovery. Within their budget constraints, they need to balance excellence in delivering basic services with their long-term aspirations and priorities. In particular, investing in an equitable and sustainable recovery from the COVID-19 crisis requires rethinking the process of budget formulation and decisionmaking.
By mapping budgets to the SDGs, cities reinforce the durability of their efforts to achieve them. For instance, Malmo developed a process to integrate the city’s SDGs objectives and planning into the city’s budgeting decisions: The budget cycle includes a strategic dialogue between specialists from the economic and sustainability units at the City Office to ensure budget aligns with the city’s commitment to the SDGs. Analyzing the development in Malmö with the SDGs has become an integral part of defining the city’s budget goals for each cycle. The city of Strasbourg has aligned in detail its annual budget and expenditures to the SDGs, identifying the main and secondary SDG targets related to each budget line, while Sardinia has developed a financial tracking tool to transparently show how financial expenditures align against the SDGs.

Figure of the week: Increasing access to electricity in sub-Saharan Africa

This month, the custodian agencies of Sustainable Development Goal (SDG) 7 released a joint report, “Tracking SDG 7: The Energy Progress Report,” which examines the progress made toward the achievement of SDG 7, “ensure access to affordable, reliable, sustainable and modern energy for all” by 2030. While progress has been made toward increasing electricity access globally—441 million more people have electricity in 2019 compared to 2010—the report highlights how the world is not on track to achieve any of the targets under SDG 7. According to the authors, the trajectory has been further diverted due to the COVID-19 pandemic that places additional burden on supply chains and consumer’s income, and is set to increase the deficit of electricity access in 2020. Moreover, write the authors, the pandemic highlighted the importance of access to reliable electricity in facilitating the delivery of vaccination doses that rely on ultracold storage and in the general success of public health programs.

The key targets of SDG 7 include ensuring universal access to electricity and clean cooking solutions, increasing the share of renewable energy, improving energy efficiency, and, finally, increasing international collaboration to support clean and renewable energy efforts.
According to the report, the overall number of people without electricity access has steadily dropped worldwide, largely driven by the shrinking deficits in Central and Southern Asian countries. Notably, as seen in Figure 1, the 20 countries that comprise the smallest share of population with access to electricity in 2019 are all located in sub-Saharan Africa. At 7 percent, South Sudan had the lowest access to electricity in 2019, and countries like Chad, Burundi, and Malawi had slightly greater access. Figure 1 also shows improvements in access over 2010-2019 within this group of 20 countries. Uganda has the greatest access to electricity at 41 percent and experienced the greatest improvement in electrification, with an average annual growth of more than 3 percent. While all 20 countries are far below the world average of 90 percent for electricity access, half of them had much greater overall annual growth than the world average.
Figure 1. Electricity access in the 20 least-electrified countries, 2010–2019

Source: “Tracking SDG 7: The Energy Progress Report,” 2021.
Overall, sub-Saharan Africa accounts for 75 percent of the world’s population without access to electricity, and, as seen in Figure 2, the region’s access deficit has increased from 556 million people in 2010 to 570 million people in 2019. Importantly, though, while the number of people without access to electricity has overall increased within sub-Saharan Africa, from 33 percent in 2010 to 46 percent in 2019, the share has actually dropped due to rapid population growth. Such a trend indicates that electrification is lagging behind population growth in many places, particularly in countries like the Democratic Republic of the Congo, Nigeria, and Malawi. However, in countries like Kenya and Mali, advances in electrification outpaced their annual growth in population.
Figure 2. Regional access deficits (in millions of people without access) for 2010, 2017, and 2019

Source: “Tracking SDG 7: The Energy Progress Report,” 2021.
The authors highlight the importance that policy and regulatory framework has in enabling such large improvements in electrification in countries like Liberia and Guinea-Bissau, and even in countries like Cameroon that have faced conflict and violence within the time period. The authors argue that support for electrification is an imperative component of recovery packages and should particularly focus on mini-grid and off-grid electrical sources that play a key role in achieving universal access—even in rural, conflict-prone areas of Africa. Such developments depend mostly on startups and small-to-medium-sized businesses that have suffered under pandemic-related lockdown provisions and disruptions in their supply chains.

Key Developments & Chart of the week

The attached Key Developments contains our Chart of the Week and the key data and other information from this week that, in our judgement, bear most importantly on the core elements of our World View. [pdf-embedder url=”https://speevr.com/wp-content/uploads/2021/06/Macro-serie… Become a member to read the rest of this article Username or E-mail Password Remember Me […]