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Mark Trahant
Indian Country Today

What does an investor mean by “risk?” How much risk is acceptable to earn a reward, a profit? And how is the word even defined?

The buying and selling of a company's shares always involves risk, one that every investor has had to measure and then accept or reject. 

So is a changing climate a material risk to a company's business model?

Many companies have already answered yes and provide climate-risk information. Some set out a detailed plan to reach "net zero" or no impact on greenhouse gas emissions, by 2030. Much of that corporate reporting frames the story as a success. It's all voluntary and there is no accountability to match a company's words with its actions.

New federal regulations could change that. And the reporting would be mandatory, instead of voluntary.

On Monday the U.S. Securities and Exchange Commission proposed new rules that would require companies to include climate-related analysis in their official reports, including information that is “reasonably likely to have a material impact on their business, results of operations, or financial condition, and certain climate-related financial statement metrics in a note to their audited financial statements.” The agency is reviewing comments for the next 60 days.

This proposed regulation could have two profound implications. First, companies will have to be accountable for what they say they are doing. And, second, a company must report its impact on the climate.

The three primary reporting requirements are known as Scope 1, Scope 2 and Scope 3. The first two would require disclosure of a company’s direct and indirect greenhouse gas emissions. Scope 3 would require disclosures of greenhouse gas emissions by suppliers and partners.

This would mean that banks, for example, would have to report greenhouse gas emissions from investments and loans. This rule could make it far more expensive to finance fossil fuel projects.

“Our core bargain from the 1930s is that investors get to decide which risks to take, as long as public companies provide full and fair disclosure and are truthful in those disclosures,” said SEC Chair Gary Gensler in a news release. “Today, investors representing literally tens of trillions of dollars support climate-related disclosures because they recognize that climate risks can pose significant financial risks to companies, and investors need reliable information about climate risks to make informed investment decisions.”

Gensler said companies and investors will both come out ahead because there will be “clear rules.”

It’s those clear rules, and definitions, that open up a split about the role of the agency and even how the government should respond to climate change.

“Many people have awaited this day with eager anticipation. I am not one of them,” said SEC Commissioner Hester M. Peirce, a Republican, said in a news release titled, “We are Not the Securities and Environment Commission - At Least Not Yet.” Pierce opposed the proposal because she said it exceeds the SEC’s legal authority to protect investors, facilitate capital formation, and foster a fair, orderly, and efficient market.

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The Wall Street Journal’s editorial board also makes the case against the rules, saying “the proposal, which was issued with only Democratic votes, is contrary to SEC history, securities law, and sound regulatory practice.” The Journal calls this policy proposal a climate coup. “The main intent of the rule is to make it easier for left-leaning asset managers like BlackRock, public pension funds and trial lawyers to bully companies. Public companies will be liable for climate disclosures the SEC deems inaccurate or incomplete.”

The danger for companies is that people, both ordinary investors, mutual funds, and other pooled groups, will take this tool seriously enough to pressure companies to change their ways in terms of climate and other material risks.

This is a case of the government following what’s already going on in markets as companies implement ESG, or Environment, Social and Governance, as an investment framework. The SEC rule would, if enacted, would add an enforcement mechanism.

Kate Finn, Osage, executive director of First Peoples Worldwide, said one of the takeaways from the 500 pages in the proposed rule is the specificity. “Which I think is a really good sign in terms of their ESG goals,” she said. “I think it is a really strong signal to the market that they are going to be holding people accountable and holding companies to their commitments.”

She said this rule is focused on the “E” for environment and the “G” for governance, leaving room for future rules that focus on social costs which directly impacts Indigenous communities and voices.

“There's no mention of local communities, there's no mention of Indigenous peoples,” she said. The SEC did not make a direct link. “I also think that's true because investors haven't made that link and because they haven't been educated. And because I think tribes haven't been able and Indigenous peoples haven't been able to speak directly to investors and influence that process as well.”

Finn said there is a gap there still and it needs to be filled with Indigenous voices, as well as allies in the investment world, to really “knit that all together.”

Social risks from Standing Rock

An example of the power of using such metrics comes from a 2018 case study on Standing Rock.

The study by Finn and other authors at the University of Colorado Law School found that Energy Transfer Partners stock “significantly underperformed relative to market expectations during the event study period, and that it experienced a long-term decline in value that persisted after the project was completed.”

From August 2016 to September 2018 the value of Energy Transfer’s stock declined almost 20 percent compared to the benchmark performance of the S&P 500 which increased in value by nearly 35 percent. There are, of course, a lot of reasons why a company’s stock may not perform as well as the overall market. But in the case of Energy Transfer Partners there was the additional burden of protests, as well as paying the cost for military-style law enforcement.

“This case study estimates that the costs incurred by ETP and other firms with an ownership stake in DAPL for the entire project are not less than $7.5 billion, but could be higher depending on the terms of confidential contracts,” the case study found.

Bottom line: Indigenous people are a material risk. “You can look at Energy Transfer Partners stock over time, right? And, and the thing with that is it's still ongoing. The report ended in 2018, but energy transfer partners just got denied, cert at the Supreme court now in 2022. So the risks don't end and the costs don't end,” Finn said. “I think our work is set out for us to telegraph that to the SEC and to telegraph that [material risk] to other investors.”

Rebecca Adamson, Cherokee, is the former director for First People Worldwide, and a director emerita, from Calvert Impact Investing.

She said the SEC proposal follows where investors already are in terms of accountability on climate.

“The millennials and Gen Z have been really carrying the torch on this stuff,” she said. One recent survey said that younger people are demanding that the planet be factored into economic decisions and more than half of millennials own mutual funds. “So then you begin to see how the pressures coming from communities and consumers in particular, and why we have to get on this bandwagon and get our voice heard at the same time having been in these boardrooms.”

Adamson said that this is the right moment for Indigenous values to be considered as a basic element for economic performance. Especially as many tribes are now significant investors.

“Tribes should really be looking at indicators of success that aren't just profit driven. I think they're in a brilliant place. All this is about how tribes thought for millennia,” she said. “We looked at the wellbeing of our people and the wellbeing of the planet in balance and harmony. And these are the values they're bringing in.”

She said that tribes have an opportunity as investors to speak out. "They need to stop investing in companies that hurt Indigenous peoples, but there's so much more around sovereign financing, right. That tribes could be doing

One of the most controversial aspects of the proposal is the Scope 3 measurements. 

SEC Commissioner Peirce, who objected to the rule, said it will be hard for a company to track down the information for Scope 3 emissions. “Even if its suppliers disclose their emissions information, a reporting company may not feel sufficiently confident in the information to include it in its SEC filings. Many companies, therefore, will have to turn to third-party consultants to help them determine Scope 3 emissions.”

Finn said she was most surprised by the inclusion of Scope 3 in the proposed regulations.

“I'm glad that Scope 3 emissions made it in,” Finn said. “Scope 3 is the best way … to measure the impacts on local communities and to understand what those risks really are.”

A 2021 study by the global nonprofit, CDP, found that 231 million tons of greenhouse gas emissions were produced from the supply chain. “This chain of environmental risk is not just an opportunity to look beyond companies’ own emissions and cascade their ambition; it is now the only way to leverage change at the scale required,” CDP found. Greenhouse gas emissions from a “company’s supply chain are, on average, 11.4 times higher than its operational emissions.”

Even then the reports are “backward looking.”

“So the cistern has already fallen through the permafrost because the permafrost melted, or the tailings have already leached minerals because the humidity is higher in the air,” Finn said. “These are things that are going to happen in the past and will be disclosed, which is good. It's good to watch. But I think what I would push for in the future in terms of investor understanding is that, but when the, what one thing that disclosures will do is force companies to have a forward looking view on how to mitigate and assess impacts on local communities around the climate and around other things as well.”

A better alternative would be to measure forward looking risk assessments.

Adamson and Finn also both said the next round of rules should be more specific about the social component to investments, including impact on Indigenous communities.

“There is a growing awareness around market-based advocacy in environmental circles,” Finn said. Yet “there's a very narrow definition of E so I think it goes right back to the fact that among the ways that we can influence this rule and influence the markets is to make those connections between a just transition (away from fossil fuels) and ESG, because we know Indigenous threads are throughout the entire ESG landscape.” The SEC proposal “opens up a pathway for us to make those links to investors.”

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Mark Trahant, Shoshone-Bannock, is editor-at-large for Indian Country Today. On Twitter: @TrahantReports Trahant is based in Phoenix. The Indigenous Economics Project is funded with a major grant from the Bay and Paul Foundations. 

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