Introduction:
Stephanie Aronson, Vice President of Brookings’ Economic Studies Program, highlighted the urgency of addressing climate change and the role of financial market regulation in achieving the Paris Agreement’s goals.

Climate Change Impacts and Government Efforts:
Climate change is manifesting in various forms, including super storms, longer wildfire seasons, and declining sea ice, calling for immediate action. Government efforts to reduce carbon emissions have been insufficient, particularly in the United States, leading to the need for additional measures.

Market Forces and Climate Risk Disclosure:
Investors recognize climate change as a risk to business models and are urging firms to acknowledge, analyze, and disclose climate-related risks. Regulators are exploring the use of financial market regulation to address climate change.

Objectives of the Event:
The event aims to explore market forces driving climate risk disclosure and regulatory trends, as well as their potential synergy in tackling climate change. The discussion seeks to advance the conversation on these critical issues.

Speaker Introductions:
Larry Fink, founder, chairman, and CEO of BlackRock: Co-founded BlackRock in 1988 and led its growth into a global investment and technology leader. BlackRock manages more money than any other investment company worldwide. Recognized as a world leader and CEO by various publications. Mary Shapiro, former chair of the SEC and current vice chair of global public policy at Bloomberg: Served as the 29th chair of the SEC and the only person to chair both the SEC and CFTC. Extensive experience as a financial services regulator under four US presidents.

Event Structure:

The event will consist of four parts:
1. Conversation with Mr. Fink on the market side.
2. Conversation with Ms. Shapiro on the regulatory side.
3. Joint discussion between both speakers.
4. Public Q&A session.

BlackRock’s Approach to Evaluating Climate Risks:
BlackRock considers climate risk a substantial investment risk and has been incorporating more types of risk into its risk management approach. The firm is developing better analytics, data, and reporting to assess climate risks, including physical impacts and transition risks. BlackRock engages with reinsurance companies to understand how climate risk is impacting geographic regions and locations.

Reshaping of Finance in the Future:
BlackRock expects a fundamental reshaping of finance due to climate change and transition risk. The firm believes that climate risk is now impacting investment decisions and behaviors of investors worldwide. BlackRock is working to translate investor concerns and regulatory developments into actionable insights for its investment strategies.

Public Companies vs. Societal Effort:
BlackRock can only play a limited role in shaping the curve of climate change through its investments in public companies. A societal effort involving municipalities, cities, private companies, and citizens is necessary to achieve the objectives of the Paris Accord. BlackRock’s letters and public statements aim to raise the profile of climate risk and encourage governments to shape public policy in this area.

Market Participants’ Role in Regulatory Action:
Market participants can play a crucial role in pushing for and informing regulatory action on climate change. They can provide data, analytics, and insights to policymakers to help them understand the risks and develop effective regulations. BlackRock believes that this is urgent and relevant not only in the US but also worldwide, as evidenced by regulatory developments in the EU and other countries.

Holistic Approach to Regulation:
Larry Fink emphasizes the need for comprehensive, unified regulations that address both public and private companies to effectively tackle climate change. He warns of a potential arbitrage issue where hydrocarbon companies may go private to avoid regulations, resulting in continued emissions and a lack of progress towards net-zero carbon goals.

Role of Public Companies and Capitalism:
Fink expresses optimism in capitalism’s ability to drive positive change in addressing climate change, but he stresses the importance of companies recognizing the need for a just transition that considers job creation alongside job loss. He emphasizes that public companies can lead the way in transitioning to a net-zero carbon economy through transparency and reporting mechanisms like TCFD and SASB.

Public vs. Private Companies:
Fink highlights the issue of private companies acquiring the dirtiest parts of energy companies and continuing harmful practices, leading to a false sense of improvement in public companies’ sustainability metrics. He calls for a holistic approach that focuses on the entire industry, including private companies, to ensure genuine progress towards climate goals.

Impact of Regulation and Transparency:
Fink commends the increasing adoption of SASB and TCFD reporting standards among public companies, which allows investors to assess their climate-friendliness. He believes that regulatory changes should be uniform and consistent across all sectors and countries to avoid arbitrage and promote fair competition.

Just Transition and Job Creation:
Fink emphasizes the importance of a just transition that considers the social and economic impacts of the shift to a net-zero carbon economy. He stresses the need to focus on job creation as rapidly as job loss to ensure a fair and equitable transition for workers affected by the changes.

Global Standard for ESG Reporting:
Larry Fink emphasizes the need for a unified global standard for ESG reporting to ensure transparency and comparability across companies. He acknowledges the differences in accounting standards between regions, such as the US, Europe, and Asia, which create confusion and hinder progress. Fink calls for collaboration among stakeholders to develop a unified standard that is acceptable to all regions.

Importance of Unified Standards:
Fink believes that unified standards would encourage more companies to participate in ESG reporting, leading to 100% participation. He highlights the need for this standardization to address the issue of companies going private to avoid ESG reporting requirements, which would undermine the effectiveness of ESG efforts.

Government’s Role in ESG Reporting:
Fink suggests that government policy can play a complementary role to market forces in promoting ESG reporting. He argues that government regulations and incentives can help ensure that private companies also participate in ESG reporting, addressing the arbitrage that allows private companies to avoid such reporting.

Market Forces and Valuation Changes:
Fink emphasizes the power of market forces in driving ESG reporting. He notes that companies focused on stakeholder capitalism and ESG reporting tend to have higher PEs than their peers, indicating a valuation advantage. This trend encourages companies to adopt ESG reporting practices to attract capital and improve their valuations.

Conclusion:
Fink highlights the importance of unified ESG reporting standards, the role of government policy in promoting ESG reporting among private companies, and the positive impact of ESG reporting on company valuations. He emphasizes the role of market forces in driving ESG reporting and the resulting valuation changes, which encourage companies to adopt ESG practices.

Call for Societal Buy-In:
Larry Fink emphasizes the importance of engaging all of society, not just public companies, in addressing climate change. He highlights the role of capital markets in promoting transparency and the need for academics to focus on society as a whole.

The Challenge of Private Company Data:
Fink acknowledges the difficulty in obtaining data from private companies, which poses a challenge for implementing policies that are effective for both public and private entities.

Global Agreement on Disclosure Standards:
Sanjay Patnaik stresses the need for a global agreement on disclosure standards to address climate change effectively. He highlights the importance of private sector initiatives like the Climate Finance Leadership Initiative and the Task Force on Climate-related Financial Disclosure (TCFD).

TCFD Framework:
Mary Shapiro provides an overview of the TCFD framework, a voluntary framework for companies and financial institutions to disclose climate-related risks and opportunities. The framework focuses on four pillars: governance, risk management, strategy, and metrics and targets.

TCFD Adoption and Impact:
The TCFD framework has gained significant traction, with endorsements from over 1800 organizations, including companies with a market cap of $16 trillion and financial institutions with assets of $160 trillion. Ten national governments have endorsed the framework, and four have announced mandatory TCFD-aligned reporting across their economies.

Key Financial and Economic Risks of Climate Change:
Patnaik poses the question of who is most vulnerable to the financial and economic risks tied to climate change. Shapiro responds that all entities are affected, including governments, municipalities, state governments, companies, and individuals.

Climate-related risks:
Climate change poses material financial risks to companies of all sizes across various sectors. Climate risks fall into two primary categories: physical risks (acute and chronic) and transition risks (change in market preferences, technology deployment, and policy drivers).

Physical risks:
Physical risks include severe weather events (e.g., fires, floods) and chronic physical risks like water shortages or persistent heat. These risks can disrupt operations, damage physical assets, interrupt supply chains, and limit companies’ ability to service debt or access capital, potentially impacting lenders, underwriters, and insurers.

Transition risks:
Transition risks arise from changes in market preferences, technology deployment, and policy drivers that can lead to a decline in demand for carbon-intensive products. This can result in stranded or devalued assets and investments in high-carbon, high-emitting sectors. Government commitments to net zero emissions and supporting policies further intensify these risks.

Materiality of climate-related risks:
SASB data indicates that 72 out of 77 industries are materially impacted by climate change. Moody’s cites ESG risk as a material consideration in 33% of their ratings actions published in 2019.

Evolving industry perspective:
Companies have shifted their perspective on climate-related risks, recognizing their materiality and financial impact. This change has occurred within the last four to five years, demonstrating a growing understanding of the urgency of addressing climate-related risks.

Regulatory oversight in the United States:
Multiple agencies in the U.S. government have responsibilities related to climate-related financial and economic risks. The SEC is responsible for disclosure of material risks by public companies, including climate risk. The Federal Reserve Board has identified climate change as a near-term risk to financial stability and is establishing a supervision climate committee to build its capacity in this area. The Treasury Department will establish a climate hub to focus on risks to the financial system and related tax policy. The Financial Stability Oversight Council, chaired by the Treasury Secretary, brings together financial regulators to identify risks to the financial system, including climate risk. The CFTC has issued a report providing a roadmap for financial regulators to manage climate risk in the financial system.

Role of the Department of Labor:
The Department of Labor should clarify that considering climate-related factors in investment decisions aligns with fiduciary duty, contradicting the previous administration’s stance. The Department of Defense has recently declared climate change a national security issue, highlighting the cross-government effort to address these concerns.

SEC’s Role in Addressing Climate Change:
The SEC has the authority to ensure that capital markets and economic decision-making are fully informed about risks, particularly for public companies. The SEC can also work with private companies to address climate-related risks.

SEC’s Historical Approach to Climate Change Disclosure:
In 2010, the SEC issued an interpretive release providing guidance to public companies on how existing disclosure requirements applied to climate change. The release focused on four areas: potential impacts of legislation, treaties, and international courts; business trends creating new risks and opportunities; scientific or technology developments; and physical climate change impacts on companies.

Current Importance of Climate Change Disclosure:
The urgency of climate change has increased since 2010, making comprehensive disclosure even more critical.

SEC’s Limitations and Focus on Disclosure:
The SEC’s role is primarily to ensure disclosure of material information, not to dictate how companies reduce greenhouse gas emissions. Emission standards and targets can be set by legislators or the administration. The market will also play a role in driving companies to reduce climate-related risks if they are adequately informed about the costs.

Potential SEC Actions:
The SEC can improve the quality and comparability of climate-related information in the marketplace by writing disclosure standards. The SEC can comment on the completeness and informativeness of climate-related disclosures made by issuers. The SEC can work collaboratively with European and other regulators to establish global standards for climate-related disclosure.

Government Agencies and Climate Risk:
Government agencies can work with the PCAOB to ensure auditors are competent in assessing climate risks. Agencies can collaborate with credit rating agencies to incorporate climate risks into credit ratings when appropriate. Regulators can utilize their influence to set expectations for the quality and comparability of climate-related disclosures by companies.

Complementing Market Developments:
Regulators can complement market developments by addressing climate risks and encouraging investments toward low-carbon alternatives. Investors are already driving market changes by steering investments toward low-carbon options, leading to valuation differences between renewable energy companies and traditional hydrocarbon-based companies.

Larry Fink’s Perspective:
Fink believes capital markets are already responding to climate risks, with renewable energy companies experiencing higher valuations compared to hydrocarbon-based companies. He emphasizes the need for increased investment in renewable energy and infrastructure in the United States to accelerate the transition. Fink highlights the challenge of executing infrastructure projects due to the decentralized nature of municipal finance in the U.S. and the need for a centralized approach.

Private Capital and Investment Opportunities:
Fink acknowledges the availability of substantial private capital for investments in renewable energy and infrastructure. He emphasizes the importance of reevaluating financing mechanisms, particularly at the state and local levels, to support these national priorities.

Investing in Grid Infrastructure:
Fink stresses the need to invest in grid infrastructure to support the increasing reliance on electricity and the transition away from hydrocarbons. He emphasizes the need for a centralized power grid to facilitate the effective integration of renewable energy sources.

Carbon Pricing and Redistribution:
Carbon pricing can be regressive, but revenue from carbon taxes could be used to offset deficits, redistribute wealth, and invest in renewable energy and infrastructure.

Taxation of Carbon:
Society has mostly targeted carbon taxation on private vehicles, but agriculture also produces significant hydrocarbons and does not have a carbon tax.

Holistic Policy Response:
A comprehensive policy response is needed to address climate change and infrastructure issues. This response should include holistic approaches to carbon pricing, infrastructure investment, and overall climate policy.

Capital Markets and Carbon Pricing:
The capital markets are already pricing in carbon risk through lower PEs for companies with high carbon emissions.

Need for Holistic Approach:
A holistic approach is necessary to reach climate goals and address infrastructure needs. This requires cooperation and coordination between various sectors and levels of government.

Carbon Pricing and Financial Market Regulation:
Carbon pricing is an effective way to reduce emissions, but it requires a holistic approach and must encompass all sectors. Financial market regulation can complement carbon pricing by incentivizing investments in low-carbon technologies and discouraging investments in high-carbon activities. Carbon pricing can be supplemented by redistributing revenues to low-income families to mitigate the impact on vulnerable populations.

Voluntary Carbon Markets:
Voluntary carbon markets can play a significant role in achieving net-zero goals by funding credible carbon reduction projects. These markets need to be scaled up significantly to make a meaningful impact.

Interplay of Regulations and Legislative Action:
Governments are increasingly focusing on climate change regulations and disclosure requirements. Financial reporting and disclosure can drive rapid changes in capital allocation towards sustainable investments. Legislative action is necessary to create a comprehensive and coordinated approach to addressing climate change.

Reallocation of Capital:
Capital markets are already reallocating capital away from carbon-intensive industries and towards sustainable investments. Rising insurance premiums, crop changes, and other climate-related risks are driving this reallocation. More disclosure and regulation can accelerate this process.

Holistic Approach:
Addressing climate change requires a holistic approach that involves governments, businesses, and civil society. It cannot be solely focused on public companies; cities, states, and individuals also need to take action. Intergovernmental and public-private partnerships are essential for effective climate action.

Challenges to Public Companies:
Public companies may struggle to meet climate disclosure targets. State and local governments lack adequate infrastructure and resilience for climate challenges.

Disclosure Mandate:
A non-prescriptive congressional mandate for climate disclosure could aid the SEC in facing potential legal challenges. The SEC has the authority to collaborate with FASB to set disclosure standards without the need for a mandate.

Legal Concerns:
Companies express fear of lawsuits due to the lack of standardized climate disclosure guidelines. Larry Fink emphasizes the need for temporary protection from liability during the transition to standardized reporting.

Global Standards:
The need for global climate disclosure standards is highlighted. IFRS and U.S. GAAP must provide comparable decision-useful information. Standard setters should work together to avoid disadvantaging companies in specific countries.

Greenwashing:
IOSCO and the SEC are focused on preventing greenwashing in climate finance. Regulators will take action against greenwashing to protect investors. Taxonomy definitions are crucial to prevent defrauding customers with false green claims.

Corporate vs. Global Greenwashing:
Larry Fink raises the issue of greenwashing at a global level. Companies may appear better by selling dirtier products to private enterprises that cause more harm to the environment. Defining greenwashing at the corporate level may not address the overall environmental impact.

Investing in Sustainable Assets:
Divesting from carbon-intensive assets without decarbonizing does not address global CO2 emissions.

Challenges in Passive Fund Management:
Actively managed funds can apply sustainability criteria, but it is challenging to transfer these requirements to passively managed funds and index funds.

Revolution in Index Funds:
The demand for sustainable index funds is growing, allowing for customization and personalization of investment portfolios.

Customizing Sustainable Portfolios:
Sustainable index funds can closely track traditional benchmarks while emphasizing ESG attributes.

Democratization of Sustainable Investing:
Disclosure frameworks like TCFD and SASB enable the creation of sustainable indexes and portfolios that align with investor preferences.

Personalization of Investment Portfolios:
The ability to customize investment portfolios based on sustainability preferences is appealing to millennials and aligns with the goals of the Paris Accord.

Impact on Valuations:
Sustainable investing will drive radical changes in valuations, leading to the reallocation of capital toward more sustainable companies.

Phasing Out Carbon-Intensive Companies:
While the complete elimination of carbon companies is not feasible in the short term, sustainable investing can prioritize companies with better environmental practices.

Continued Presence of Carbon Companies:
Sustainable investing aims to phase out carbon-intensive companies gradually while recognizing their current role in the economy.