How do investors determine the value of a stock, and what does that have to do with the SEC’s climate-related disclosure proposal?

When you as an investor are making an investment decision, or when an analyst is analyzing a stock, they might build a model about the company’s future and do some math to come up with a value. If that value is higher than the stock price, a shareholder might decide to buy more shares; if it’s lower, of course, she might sell.

A lot of factors go into this economic analysis. In addition to the historical information, investors want to assess potential risks and opportunity about the future. And risk, by its definition, often involves events that have not yet occurred.

Is the market in which the company operates going to grow or shrink? What are the company’s revenues and costs? What are its competitors up to? What about the supply chain? What about new technologies or other resources the company relies upon?

In other words, what overall environment are these companies operating in?

By “environment,” I mean a broad swath of things, like borrowing costs and overall economic growth. 
Increasingly, though, investors are making decisions based upon the risks and opportunities presented by another kind of environment—the climate and climate risks.

Many investors today are thinking about and getting into issues around a company’s climate risk and in particular the transition risks to things that may happen in the future in our economy.  Like, evolving customer preferences, regulatory changes that might be on the horizon, changes in supply, changes in the competitive landscape related to climate risk. 

Today, climate-related factors and risks can affect a company’s bottom line and its future—and therefore, investors’ decisions to buy, hold, or sell, or vote on a proxy.

Investors’ models may be incomplete without this information.

Today, investors are already making investment and voting decisions using information about climate risk. Today, hundreds of companies are already disclosing this information, and this gets to the heart of the Commission’s role.

The SEC can bring greater consistency, comparability, standardization in this conversation that’s already going on—and that’s what’s embedded in the Commission’s proposal related to climate-related disclosures by public companies.

This detailed proposal is out to public comment. I encourage everyone take a look companies and investors thinking about the efficiency in our markets. 
Give us your thoughts. Go to sec.gov and weigh in.

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