Companies are under growing pressure to disclose the business risks associated with climate change. Recent high-profile government investigations, together with increased shareholder activism involving major energy companies, has elevated public awareness of climate change disclosure issues. However, these activities focus on the singular actions of individual corporations. Now Congress is bringing attention to the Securities and Exchange Commission’s (SEC’s) climate change disclosure requirements and whether or not such requirements should be expanded and formalized. This federal activity will have a more direct impact on all SEC registered businesses and their stakeholders.
In March of 2016, a coalition of states, headed by the New York Attorney General, launched a formal investigation of oil major ExxonMobil for allegedly misleading its shareholders and the public at large concerning the relationship between climate change and the company’s activities. The ExxonMobil investigation has been viewed as part of a broader effort to bring pressure on the fossil fuel industry to more closely scrutinize and address its effects on the environment. Meanwhile, the nonprofit group CERES reports a sustained increase in shareholder engagement through investor resolutions targeting corporate transparency on climate, energy, and sustainability issues. These efforts are intended to make corporate boards address the environmental impact of corporate activities. This type of activity represents the strategic application of general corporate governance laws in a relatively new setting. Meanwhile, action by the SEC and Congress targeting corporate sustainability and climate risk disclosures is picking up steam. This legislative and administrative action could formerly clarify and expand disclosure obligations for all public companies and any other businesses subject to SEC regulation.
Companies registered with the SEC must conform to the disclosure requirements set forth in Regulation S-K (addressing non-financial information) and Regulation S-X (addressing financial statements). Other SEC rules compel companies to augment these codified disclosures with material information that may be necessary to ensure that the statements expressly required by Regulation S-K and Regulation S-X are not, in light of the circumstances under which they are made, misleading. In 2010, the SEC issued a formal guidance concerning corporate disclosures specifically addressing climate change. See Commission Guidance Regarding Disclosure Related to Climate Change, Release No. 33-9106, Release No. 34-61469, 2010 WL 2199526 (Feb. 2, 2010) (“2010 Guidance”). This document provides direction to registered companies concerning agency expectations applicable to climate change disclosures. While the 2010 Guidance does not, in itself, carry the force of law, it is intended to help companies understand how the SEC will interpret their efforts to satisfy the disclosure obligations required by federal securities laws. The SEC therein identified four broad categories of climate change business effects for consideration: (1) significant developments in federal and state legislation and regulation regarding climate change; (2) treaties or international accords relating to climate change; (3) the indirect consequences of legal, technological, political, and scientific developments regarding climate change on business trends; and (4) the physical impacts of climate change on the business.
Since its release, application of the 2010 Guidance has been inconsistent. In January 2016, the U.S. Government Accountability Office (GAO) reported that between 2010 and 2013, the SEC had sent comment letters related to climate change to just 23 companies through 2013, and none thereafter. See Supply Chain Risks, SEC Plans to Determine if Additional Action is Needed on Climate-Related Disclosure Have Evolved (sic), GAO-16-211, 2016 WL 467114 (Jan. 6, 2016). Moreover, the GAO found that while the SEC had monitored the impact of its guidance on corporate filings through routine review, it had not taken the additional steps it set forth in the 2010 Guidance namely, holding public roundtables or addressing the issue with its Investor Advisory Committee.
The House and Senate is taking notice. On October 23, 2015, dozens of Democratic lawmakers wrote the SEC to express concern about its failure to more aggressively pursue and enforce aspects of the 2010 Guidance. Senators Jeff Merkley (D-OR), Brian Schatz (D-HI) and Jack Reed (D-RI), in particular, continue to criticize the SEC for failing to pursue climate change disclosures more robustly. Pushback is coming from the other side of the aisle. For example, Congressman Bill Posey (R-FL) successfully sponsored an amendment to this year’s Financial Services and General Appropriations Spending Bill (H.R.5485) that effectively prohibits the use of funds to administer or otherwise effectuate the 2010 Guidance. Moreover, although the budget process remains stalled and the passage of individual spending bills this session is unlikely, a similar provision has been picked up in the Senate’s version of this spending bill (S.3067).
Absent legislation, this Congressional debate is designed to keep political pressure on the SEC while it undertakes a general review of its corporate disclosure requirements, including those related to climate change and corporate sustainability. In April 2016, the SEC issued a concept release seeking comment on its proposals to update and modernize regulation S-K. See Business and Financial Disclosures Required by Regulation S-K, Release No. 33-10064, Release No. 34-77599, 2016 WL 1458170 (April 21, 2016). This release is part of the SEC’s disclosure effectiveness initiative, a scoping review of disclosure, presentation, and delivery requirements for registered companies. It requested comment on the disclosure of sustainability matters, including how important such disclosures are for investors, what form such disclosures might take, and the costs and challenges of providing such disclosures. Business friendly trade associations and environmental interest groups have weighed in. These organizations are using the current SEC deliberation as a renewed opportunity to influence whether or not formal corporate disclosures specifically addressing climate change and sustainability should become mandatory. Those advocating for increased disclosure obligations believe that clarity, coupled with the force of law, is necessary to account for the impacts of climate change on the economy and identify investor risk. Those against mandatory disclosure rules argue that the issue is strictly political and that it would be improper to use securities laws to promote public policy objectives or drive corporate behavior.
Aside from the SEC’s 2010 Guidance, there are a fair number of unofficial and voluntary guidance initiatives that address the public reporting of climate change and corporate sustainability. Among the most influential and widely used are the Global Reporting Initiative (GRI) Standards as set by the Global Sustainability Standards Board. However, while these voluntary standards call for sustainability reports to be prepared in accordance with certain principles on content and materiality, they do not carry the force of law. If the SEC regulations change as a result of the current agency review of regulation S-K, climate change and sustainability disclosures will rapidly move well beyond the current debate over simple good governance and shareholder activism.