Sen. Warren Proposes SEC Crackdown On Oil & Gas

By Nick Cunningham

Warren

Oil and gas companies could face greater regulatory pressure to disclose their financial risks to climate change in a Democratic administration.

Senator Elizabeth Warren (D-MA) reintroduced legislation this week that would require publicly-traded companies to report their risks related to climate change. The Climate Risk Disclosure Act would direct the Securities and Exchange Commission (SEC) to issue new rules on reporting requirements, forcing oil and gas companies to report their exposure to climate change itself, but also to disclose their risks to climate policy, assuming governments seek to adhere to the Paris Climate Agreement.

Sen. Warren explained the logic in a post on Medium. On the one hand, any business could face serious financial risks from climate change, as flooding, severe storms, drought and other climate-related effects grow worse, destroying property or otherwise disrupting operations. A real estate company with assets on the coast faces obvious risks, for example, and should disclose them.

But at the same time – and this is where it directly relates to the oil and gas industry – as governments tighten the screws on climate policy, many fossil fuel companies could see their valuations plunge as many of their assets become worthless. “Experts estimate that if the world makes the changes necessary to meet the emissions goals of the Paris climate accord, at least 82% of global coal reserves, 49% of global gas reserves, and 33% of global oil reserves will have to go unused the next 30 years,” Sen. Warren wrote. “The market is not appropriately pricing in this risk,” and instead there is “an inflation of the value of fossil fuel companies that could burst and threaten the financial system.”

Her proposal to tighten SEC oversight would “also demonstrate to investors that — if nothing else — climate change represents a serious risk to their money and they need to demand global action to address it,” Sen. Warren concluded, noting that not only is climate change a planetary threat, but also a problem of systemic financial risk.

Typically, one could ignore proposed legislation like this. The Senate is in Republican hands, and the bill has no chance of passage. Even after the 2020 election, there is a strong chance that the GOP retains control of the Senate. However, Sen. Warren is a top tier candidate for president and the SEC under her administration could issue new rules on its own. Even if she doesn’t make it through the Democratic primary, if some other candidate wins the primary and goes on to win the general election, they may take up this idea. After all, the legislation is cosponsored by the other Senators running for president, including Senators Booker, Harris, Gillibrand, Bennet and Klobuchar.

The proposal comes after several years of back and forth between oil companies and their shareholders. For instance, ExxonMobil just beat back an attempt by its own shareholders calling on the oil company to disclose targets for reducing greenhouse gas emissions. Notably, Exxon appealed to the SEC, and the agency ruled in the company’s favor, deciding that the shareholder resolution amounted to micromanaging the company.

As if to highlight how important control of the White House is, the SEC’s recent decision on Exxon stands in sharp contrast to its actions under the Obama administration. It was only a few years ago that the SEC opened up an investigation into ExxonMobil into whether or not the company was misleading its investors. If climate change and increasingly restrictive climate policy meant that Exxon and others would not be able to produce all of the oil and gas reserves on its books, then the company was not worth nearly as much as it said it was. The reserves would have to stay in the ground. If Exxon knew this, then it was defrauding its investors.

Or, put another way, if oil demand peaks and declines over time – as a growing number of analysts believe, including from the industry – then oil prices have a certain ceiling and, again, the industry may not be able to produce all of the oil on its books. Just a week ago, a top official at BP told Bloomberg News that some of its reserves “won’t see the light of day.” Reserves that are expensive or too time-consuming to produce “won’t come out the ground,” BP’s Dominic Emery said.

The SEC quietly shelved its investigation last year, presumably shifting course under President Trump, but admissions like BP’s may only be the tip of the ice berg. Even though the industry has friends in Washington right now, that might not always be the case. In any event, investorsare already wising up to the risks. By any measure, energy stocks continue to badly underperform other sectors.

By Nick Cunningham of Oilprice.com

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