Right now, the way the SEC rules are structured is not very forward-looking when it comes to physical risks. Companies are mostly required to disclose substantial disaster-related impacts from the current year and the associated costs, without a requirement to project future risks. While I’m fortunate to be surrounded by people who think about these issues regularly, there’s still no consensus on the best approach, and no one knows how companies should be handling this, either in the EU or the US.

In the EU, the disclosure regime is more prescriptive and forward-looking, but it seems overly broad. Companies are asked to assess and disclose every conceivable physical risk, such as soil fluctuations and glacier outbursts, without clear guidance on prioritization. This often leads to companies using extensive computing resources to analyze all their assets. The effectiveness of this approach remains to be seen, but as of now, it appears poorly designed.

A major issue is the lack of integration between different sectors of the government. For example, there should be more collaboration between economists in the US Treasury and climate impact scientists at NOAA. It was frustrating to see that the Federal Reserve’s climate stress test did not include a single climate scientist, leading to basic errors like questioning the impact of hurricanes on New York under specific emission scenarios for 2050. I’m advocating for the US government to better incorporate scientific insights. While the EU does a somewhat better job integrating science, they too have not fully resolved the issue, and their risk scenarios are still incomplete.

European asset managers and institutional investors are more proactive about decarbonization, viewing it as part of their fiduciary duty. They understand the importance of internalizing externalities and acting as universal owners. In contrast, this mindset is less prevalent in the US, mainly seen in large public pension funds like CalPERS and the New York State Treasurer’s fund. Interestingly, the leaders of CalPERS and CalSTRS are not necessarily driving the climate conversation but are reacting to pressure from the California legislature to divest from fossil fuels, which makes them more active on climate issues. This difference in attitude can be partly attributed to cultural factors, as Europeans have been more concerned about climate change for a longer time and are more willing to take action.

I believe Warren Buffett is not a positive influence on climate action. It was surprising to read his letter in the Financial Times, where he claimed that all utilities would eventually need government bailouts and ownership, especially since just a year prior, he downplayed climate risks and criticized ESG reporting. This inconsistency is troubling because it highlights a broader disconnect that needs to be addressed. There needs to be political will and public opinion to bridge the gaps between our bankruptcy system, ESG disclosure system, and corporate governance system, which currently operate in isolation. It will be interesting to see how the politics of potential bailouts for these companies unfold and whether it will lead to meaningful reforms.