Leaving Investors in the Dark: the SEC’s Growing Silence on Guidance Related to the Business and Legal Developments on Climate Change
February 7, 2019 by Caitlin Meagher
By Capriel Stevenson, Staff Contributor
The physical impacts of climate change affect companies and their profitability drastically. The SEC released guidance in 2010 urging companies to disclose the risks from climate change but has not further urged companies in recent years. Instead, the SEC has shifted towards regulating other issues the current administration has prioritized, leaving investors in the dark about the financial impacts climate change has on businesses.
The sense of urgency from the Securities and Exchange Commission (“SEC”) to require corporate disclosure of the effects of climate change on corporations and their investors has decreased in the past few years. During President Obama’s first term, the SEC faced immense pressure to provide more information to investors on both climate change and cybersecurity.[i] In January of 2010, the SEC issued interpretive guidance about disclosures related to business or legal developments on climate change.[ii] Following this, in October of 2011, it issued guidance and requirements for disclosures relating to cybersecurity risks and cyber incidents.[iii] In the current administration, although there has been significant progress by the SEC in cybersecurity, the progress on climate change has come to a halt.[iv]
In 2010, the SEC unveiled requirements for companies to disclose the effects of climate change on business profitability to investors.[v] The SEC’s disclosure included several proposals, like requiring a registrant in Regulation S-K to disclose to the business and its subsidiaries information including some environmental information, its principle products and services, major customers, form or organization, and competitive conditions.[vi] The SEC also requires registrants to provide information on “significant factors” that make an investment in the registrant speculative or risky or the material effects of environmental legislation on the registrant’s financial condition or operations.[vii] But when it came to disclosures of the impacts from the physical effects of climate change, the SEC lacked specificity. The SEC requires that “registrants whose businesses may be vulnerable to severe weather or climate related events should consider disclosing material risks of, or consequences from, such events in their publicly filed disclosure documents.”[viii] This leaves a large amount of discretion to the companies on what they want to disclose, threatening to leave investors in the dark about the impacts of climate change on their investments.
This lack of movement is not true in the SEC’s regulation of cybersecurity, which is reflective of the current presidential administration’s priorities. There have been detailed and significant developments by the SEC from their initial guidance in 2011, including a recently issued interpretive guidance on expectations for corporate disclosures on cybersecurity risks in February of 2018.[ix] President Trump’s administration has taken a strong stance on cybersecurity, releasing America’s first cybersecurity strategy in fifteen years.[x] When addressing climate change though, the perspective disclosed on the White House’s Energy and Environment page only mentions environmental protection in the context of balancing it with American energy policy.[xi] In an administration known for dismissing the impact of climate change,[xii] the SEC’s priorities emulate the administration’s urgency to address cybersecurity but dismiss the impacts of climate change.
The lack of disclosures from the SEC has not halted all research and releases on the financial impacts of climate change.[xiii] It is estimated that that the global transition to a lower-carbon economy will require around $1 trillion of investments per year for the foreseeable future.[xiv] Furthermore, in 2015 a study estimated the value at risk from climate change to the total global stock of manageable assets ranges from $4.2 trillion to $43 trillion between now and year 2100.[xv] To address these issues and identify information needed by investors, lenders, and insurance underwriters to determine the climate-related risks, the Financial Stability Board established the Task Force on Climate-Related Financial Disclosures (“Task Force”).[xvi] The Task Force released recommendations in June 2017 providing guidance to companies for developing effective climate-related financial disclosures in their annual reporting.[xvii] It concluded that many companies describe climate related risks and opportunities, but few disclose the financial impact of climate change on the company itself.[xviii] Although it suggested guidance for what companies should do in order to refine their climate-related disclosures, including disclose forward-looking climate resilience strategies, incentivizing companies to refine their climate-related disclosures could be difficult when environmental forward thinking may not be a company’s top priority because of the financial uncertainty.[xix] It’s time that the SEC matches the effort it has continually made with cybersecurity and develop clear and constructive guidance to protect investors from the impacts of climate change.
[i] See E. Lynn Grayson, et. al, SEC Disclosure Obligations Increasing Scrutiny on Environmental Liabilities a Climate Change Impacts, Environmental Issues in Business Transactions, https://jenner.com/system/assets/publications/1696/original/Environmental_Issues_in_Bus_Trans_Chapter_15_SEC_Disclosure.pdf?1319653867; See Christopher Wolf, SEC Issues First-Ever Guidance on Disclosure to Investors of Cybersecurity Risks, Hogan Lovells (Oct. 14, 2011), https://www.hldataprotection.com/2011/10/articles/financial-privacy/sec-issues-firstever-guidance-on-disclosure-to-investors-of-cybersecurity-risks/.
[ii] U.S. Securities and Exchange Commission, SEC Issues Interpretive Guidance on Disclosure Related to Business or Legal Developments Regarding Climate Change (2010).
[iii] Benjamin A. Powell, et al., SEC Issues New Guidance on Disclosing Cybersecurity Risks and Incidents, WilmerHale (Oct. 27, 2011), https://www.wilmerhale.com/en/in sights/publications/sec-issues-new-guidance-on-disclosing-cybersecurity-risks-and-incidents-october-27-2011.
[iv] See Alexandra Semenova, SEC Stops Prodding Companies to Detail Climate Change Impacts, Bloomberg BNA (July 16, 2018), https://www.bna.com/sec-stops-prodding-n73014477478/; See Holland & Knight LLP, SEC Issues New Cybersecurity Guidance; Makes Clear that Cybersecurity Disclosures Are Part of Existing SEC Requirements – Guidance Follows Cybersecurity Concerns Raised in White House Executive Order 13800, JD Supra (Feb. 26, 2018), https://www.jdsupra.com/legalnews/sec-issues-new-cybersecurity-guidance-17201/.
[v] See U.S. Securities and Exchange Commission, Commission Guidance Regarding Disclosure Related to Climate Change (2010).
[vi] See id.
[vii] Id at 15.
[viii] Id at 27.
[ix] Holland & Knight LLP, SEC Issues New Cybersecurity Guidance; Makes Clear that Cybersecurity Disclosures Are Part of Existing SEC Requirements – Guidance Follows Cybersecurity Concerns Raised in White House Executive Order 13800, JD Supra (Feb. 26, 2018), https://www.jdsupra.com/legalnews/sec-issues-new-cybersecurity-guidance-17201/.
[x] Grant Schneider, President Trump Unveils America’s First Cybersecurity Strategy in 15 Years, The White House (Sept. 20, 2018), https://www.whitehouse.gov/articles/president-trump-unveils-americas-first-cybersecurity-strategy-15-years/.
[xi] Energy and Environment, The White House, https://www.whitehouse.gov/issues/energy-environment/.
[xii] Coral Davenport, Trump Administration’s Strategy on Climate: Try to Bury Its Own Scientific Report, The New York Times (Nov. 25, 2018), https://www.nytimes.com/2018/11/25/climate/trump-climate-report.html.
[xiii] See, e.g., Final Report: Recommendations of the Task Force on Climate-Related Financial Disclosures, Task Force on Climate-Related Financial Disclosures (June 2017), https://www.fsb-tcfd.org/publications/final-recommendations-report/.
[xvii] Task Force on Climate-Related Financial Disclosures, Recommendations of the Task Force on Climate-Related Financial Disclosures (2017).
[xix] See id.