I chair the investment committee of America’s second-largest pension fund. Here’s why savvy investors back the SEC’s proposed ESG disclosure rules

March 9, 2023, 12:58 PM UTC
Cars are stranded in flooded North Hollywood, California, on Feb. 25.
Irfan Khan—Los Angeles Times/Getty Images

As the nation deals with floods, fires, and other extreme weather events fueled by climate change, it may come as a surprise that relatively little is known about one of the largest sources of greenhouse gas emissions: publicly held companies. That is because there are no federal rules requiring these major drivers of the nation’s economy to disclose critical information about the impact of climate on their businesses.

With more than half of U.S. households invested in the stock market, the lack of reliable and consistent climate-related data puts their investments–and the future of the U.S. economy–at risk.

Fortunately, there is a solution that would help level the playing field by providing all investors access to important climate-related data to inform their investment decisions on climate risks and returns. The U.S. Securities and Exchange Commission (SEC), which regulates capital markets to protect investors, should exercise its authority to strengthen rules requiring public companies to disclose their greenhouse gas emissions so investors can manage these risks.

The SEC should move forward despite facing resistance from some companies, and from lawmakers in this era of divided government, over the hot-button issue of why environmental, social, and governance (ESG) factors are material to investors, which has reached the boiling point in Washington, D.C.

The science, however, is clear: To ensure the future of our planet, the U.S. economy must transition to net zero greenhouse gas emissions. At the global climate summit (COP 27) in Egypt last November, President Biden underscored the U.S. commitment to achieving net zero carbon emissions by 2050.

Yet progress in the private sector toward this goal must be accelerated. According to a study by Accenture, over 90% of the world’s largest corporations must double their rate of emissions reductions by 2030 to meet their net zero goals. And while voluntary disclosures of emissions have risen, they continue to fall woefully short.

When material facts affecting the sustainability of investment returns are not publicly available, investors cannot prudently direct their money toward assets with lower climate risks, analyze the progress of company emissions reduction commitments, and assess the impact of climate risk on a company’s financial performance.

The SEC has proposed rules requiring public companies to disclose both direct (Scope 1) and indirect (Scope 2) greenhouse gas emissions across their operations, building on guidance from the Task Force on Climate-related Financial Disclosures (TCFD). While the SEC’s proposals are a step forward and would provide more reliable, consistent, and comparable information to investors, all company emissions, including value chain (Scope 3) emissions, should be included.

According to the U.S. Environmental Protection Agency, Scope 3 emissions often represent the majority of an organization’s total greenhouse gas emissions. These come from assets that are not owned by the company but that exert an indirect and significant impact on its value chain, from raw materials, components, and other inputs into the production process to post-production outputs that support sales, marketing, distribution, customer service and other functions aimed at the end user.

Taken together, these three types of disclosures would help investors better understand how climate impacts risk and return across their investment portfolio.

Any responsible, science-based transition to a low-carbon economy must involve the world’s governments, businesses, investors, and communities. The federal government and states such as California are taking action to decarbonize all sectors of the economy and scale investments in climate solutions, and a growing number of companies are working to reduce greenhouse gas emissions across their operations. Including data about emissions in financial reporting is critical to getting there, because integrating ESG factors contributes to prudent decision-making in an increasingly sophisticated and modern investment landscape.

Shareholders are also exercising their power to change company practices by putting pressure from within to strengthen the financial health and long-term value of their investments. Just as corporate boards have a responsibility to act in shareholders’ best interests, many shareholders are concerned with mitigating risk and contributing to the sustainable value of their investments for their beneficiaries. The SEC can help accelerate the transition to a global net zero economy, and fulfill its mission to protect investors, by requiring publicly held companies to fully disclose and transparently report their greenhouse gas emissions.

William Prezant serves as investment committee chair of the California State Teachers’ Retirement System, the second-largest pension fund in the U.S.

The opinions expressed in Fortune.com commentary pieces are solely the views of their authors and do not necessarily reflect the opinions and beliefs of Fortune.

More must-read commentary published by Fortune:

Fortune‘s CFO Daily newsletter is the must-read analysis every finance professional needs to get ahead. Sign up today.

Read More

Great ResignationClimate ChangeLeadershipInflationUkraine Invasion