Miners Shouldn’t Fight to Keep Climate Data Buried

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Why do you buy stock in a particular company? There is an established template for answering this, centered on things such as discounted cash flows. But this is by no means the only answer.

A fairly popular one, if not necessarily admitted, is that the stock has been going up. Some people might personally like the products made by that company. Still others may feel a company shares their politics. And some just want to feel like part of the Reddit crowd.

In all cases, you could say the investor is biased in favor of that particular stock; or, conversely, against the ones they overlooked or sold. You could say that, but it would be meaningless. Like saying you’re biased against the chicken because you ordered the pasta. What did the chicken ever do to you? Did Big Pasta get to you? That way madness lies.

Which brings me to the National Mining Association. Like many other industry groups, the NMA just sent a letter to Gary Gensler, chairman of the Securities and Exchange Commission, with comments on potential new rules for companies around disclosing climate-related risks. The nub of the argument:

NMA is concerned that mandatory disclosure rules — particularly related to non-material climate-related risks — could proliferate investment bias and practices by investors and financial institutions to exclude certain energy-intensive companies and sectors from investment portfolios or restrict access to or significantly increase the cost of capital.

Clearly, the NMA has a vested interest — a bias? — toward avoiding anything that would “significantly increase the cost of capital” for its members. That’s just trade association-ism 101.

But the NMA is especially sensitive to this because that cost has been rising already for some of the industries it represents, with coal producers being an obvious example. The business of digging stuff out of the ground, especially stuff that gets burned, bears the brunt of measures to mitigate climate change. Advertising that fact with a new set of tables at the back of the 10K might persuade an investor not to buy a company’s stock or even just write off an entire sector.

To call that “bias,” however, brings us back into the chicken versus pasta controversy. It’s meaningless. In effect, the NMA is concerned that increasing the information available to investors may cause them to act on that information in a way the NMA doesn’t appreciate. Its argument further down in the letter that any mandatory climate disclosures should be filed separately from the 10K annual report is of a piece with this. It all runs rather counter to disclosure as a concept. 

The SEC’s efforts are, of course, happening in the context of a new administration explicitly targeting climate change. The NMA is naturally concerned this might just be politics by other means. It is almost certainly correct about that. President Joe Biden hasn’t been shy about pulling executive levers to achieve what a 50/50 Senate may not.

Yet in doing so, he’s hardly swimming against the tide in capital markets. Money has been flowing away from the materials sector, as well as fossil fuels, for a while. Besides the collapse in valuations, anecdotal evidence abounds, ranging from Exxon Mobil Corp.’s surprise proxy-contest defeat to Arch Resources Inc., an NMA member, dropping “coal” from its name, with even the press release avoiding mentioning the word. The fact that Texas, bastion of free enterprise, felt the need to pass a law cutting off banks that won’t do business with the oil and gas industry signals how far things have gone already on Wall Street.

There’s a circularity at work. The more Biden signals a shift on climate policy, the more investors might choose to position themselves ahead of it. Would that be “investment bias” or just plain old foresight and risk management?

Elsewhere in the letter, the NMA expresses concern that “rapidly evolving” expectations for climate and broader ESG disclosures could leave any SEC standards in the dust. Meanwhile, mandates to disclose “non-material” climate-related information might cause “confusion.” These are useful observations framed in a non-useful way.

The NMA is right that climate-related disclosures are all over the map even as the map is still being drawn. Indeed, the NMA actually talks up the various metrics and sustainability reports many companies provide already. Yet it is the proliferation of such tailored reports that sows confusion and demands an attempt at standardization. As for what counts as material information, that is certainly debatable, but it doesn’t follow this should mean standing pat.

Mandatory climate disclosures would almost certainly not please everyone, companies and investors alike. One analogy is the reserves and production disclosures oil and gas companies have had to report at the back of their annual accounts for decades. These are flawed in several respects, such as the emphasis on proved reserves. But they are standardized and comparable, and no serious investor would demand the SEC ditch them to avoid “confusion.” Oil and gas companies are still free to supplement those measures with their own, and they certainly do, with everything from field-level rates of return to “type-curves” for fracked wells. There’s no reason climate disclosures couldn’t also follow twin paths.

The NMA is on firmer ground raising concerns about the use of third-party measurements of climate-related performance, especially when it comes to judging materiality. Defining the scope of emissions or factoring in arcana like offsets are indeed tricky concepts, and ESG scoring has its own sub-industry of consultants vying for business. The SEC, which is also scrutinizing the ESG investment industry for misleading claims, must be careful in giving its imprimatur to data that may indeed befuddle rather than inform investors.

Important as that is, however, it’s a question of methodology. And that question informs but doesn’t negate the underlying premise of climate-related disclosure: greater transparency. If bias is the problem, then more information is often the cure.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Liam Denning is a Bloomberg Opinion columnist covering energy, mining and commodities. He previously was editor of the Wall Street Journal's Heard on the Street column and wrote for the Financial Times' Lex column. He was also an investment banker.

©2021 Bloomberg L.P.

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