By Gregory Zerzan, Shareholder
U.S. financial regulators are increasingly focusing their attention on climate change. An oft-discussed topic is risk disclosure related to the impacts of climate change on publicly traded companies. As Securities and Exchange Commission Chair Gary Gensler stated during his confirmation hearing, "There are tens of trillions of investor dollars that are going to be looking for more information about climate risk," and "[i]ssuers will benefit from such disclosures." Fortunately for those seeking to gain insight into the effects of climate change on publicly traded companies, there is already a tool that can provide useful information and benefit investors: security futures products (SFP).
SFPs were borne out of the Commodity Futures Modernization Act of 2000 (CFMA). The long and tortured history of futures contracts based on securities is beyond the scope of this article but suffice it to say it was well known by Chairman Gensler. As Undersecretary of the Treasury for Domestic Finance at the time, he was instrumental in finally creating a legal pathway for the trading of single-stock futures.
SFPs allow market participants to speculate upon or hedge the risk of future price movements of a company’s stock. Like other futures contracts, SFPs provide an important risk management tool while also creating a powerful investment opportunity. And, relevant to the topic of climate disclosure, they provide important information about future events.
SEC-mandated climate-risk disclosure requirements will place publicly traded companies in the difficult position of trying to predict the future and then put SEC staff (and investors, and lawyers) in the position of evaluating these predictions. Unfortunately, these efforts are unlikely to provide much useful information–the future largely remains unknowable.
However, futures markets do a great job at revealing the market’s view of future conditions. Although markets are hardly clairvoyant, given the futility of trying to accurately predict the future, they do the next best thing–provide insight into what a large group of people, with money at stake, think about the future.
Since public companies are already required to disclose material risks to investors, additional requirements related to climate are unlikely to provide new information. SFPs provide the best tool available for providing investors meaningful information about the risks to public companies from climate change. To the extent there is knowable information about the impacts of climate change on a public company, it will be reflected in the price of the SFP based on its stock. SFPs, the prices of which will reflect the views of investors, speculators, and market analysts, will reflect a much broader and more useful assessment of predicted climate-related impacts.
Unfortunately, SFPs have never taken off in the United States. Although the CFMA created a pathway for securities futures, by treating an SFP as both a security and a futures contract the law created regulatory burdens that have proved difficult to surmount.
This is a shame. SFPs can provide market participants with the best, most reliable way to evaluate the future impact of climate change on public companies. Chairman Gensler, as former head of the CFTC, is uniquely qualified to remove the barriers that have thus far stymied the development of a thriving SFP market. Doing so will go a long way toward meeting regulators’ goals on climate disclosure.
Gregory Zerzan is an attorney with Jordan Ramis PC. Zerzan has served in a wide range of roles in the U.S. government, including as Acting Assistant Secretary of the U.S. Treasury, Counsel to the House Committees on Agriculture, Financial Services, and Energy and Commerce, and as Principal Deputy Solicitor of the U.S. Department of the Interior.
