On April 4, a diverse group of organizations, including investor protection and shareholder advocates, climate advocates, and businesses, wrote to Securities and Exchange Commission Chairman Gary Gensler to highlight how private markets contribute to and exacerbate climate-related risks for investors and our financial system and what the Commission must do to meet these growing risks.

Specifically, the letter discusses the troubling and emerging trend of public companies shifting carbon-intensive, “dirty” assets from their balance sheets into private markets, a practice known as “brown spinning.” These transactions, which can effectively remove high emitting assets out of publicly available disclosures and into the shadows of private markets, are increasingly being employed in emissions-intensive industries, often to meet seemingly altruistic climate goals. Regrettably, the net effect is that the climate impacting assets and activities continue unabated while the associated climate-related risks for investors and markets become worse and more difficult to assess. As the letter states, “The ability of private companies to stay dark and of public companies to shift dirty assets into the dark could mean that the overall levels of emissions and climate impacting activities could remain the same, or perhaps even grow. If private markets become a de facto risk repository for the dirtiest assets, then despite the Commission’s best efforts to facilitate relevant climate-related information, investors would remain in the dark about these risks, unable to price these risks effectively or ascertain their true exposure to these risks.”

To address this issue, the letter urges the Commission to take decisive action to limit companies’ ability to hide climate-related risks in private markets and to promote the health and vitality of public markets generally. This can be done in part by reining in the excessive growth of private markets. Accordingly, the SEC should move forward with several regulatory proposals that are currently on the Agency’s agenda, including updating the Accredited Investor definition, making modest changes to the Regulation D framework, and making long overdue changes to Section 12(g) of the Exchange Act. The letter observes that “these updates would stem the growth of private markets and encourage companies to go public, where they would be subject to public disclosure requirements, including disclosure of their climate- and other Environmental, Social, and Governance-related risks.”

Unless the structural problems that allow companies to effectively hide dirty assets in private markets are addressed, “the Commission’s efforts to improve climate disclosures [for public issuers] will, at best, be a partial success, leaving a wide swath of investors and our markets vulnerable to the profound risks of climate change, and compounding the unhealthy imbalance between public and private markets that exists today.”