The acting chair of the U.S. Securities and Exchange Commission (“SEC”) last week issued a statement (available here) directing the agency to focus on climate-related disclosures in public company filings. The statement is in line with market expectations that the SEC under the Biden administration will push disclosure reform related to environmental, social and governance (“ESG”) matters, including new disclosure requirements for publicly traded companies to inform investors of their exposure to climate change risks and the potential impacts of new climate change-related regulations. In addition, we believe public companies can expect increased scrutiny by the SEC of climate change-related disclosures (or the lack thereof) in SEC filings and potential enforcement actions in this area.
In Wednesday’s statement, acting SEC Chair Allison Herren Lee said that she has asked the Division of Corporation Finance to review the extent to which public companies are following interpretive guidance the agency issued in 2010 regarding disclosure requirements as they apply to climate change matters (see client alert available here). As part of that review, the agency “will assess compliance with disclosure obligations under the federal securities laws, engage with public companies on these issues, and absorb critical lessons on how the market is currently managing climate-related risks.” Lee said agency staff will use the review to begin updating the 2010 guidance to take into account developments over the last decade.
U.S. securities laws require that public companies provide investors with “material information” in SEC filings and securities offerings. Information is considered material if there is “a substantial likelihood that a reasonable shareholder would consider it important.” The 2010 SEC guidance flagged a number of areas companies should consider for inclusion in public disclosures, including the impact of climate-related legislation and regulation, international accords such as the Paris Climate Agreement (which President Biden recently rejoined), the indirect consequences of climate-related regulation or business trends, and the physical impacts of climate change. The SEC, however, has not passed specific rules addressing climate-related disclosures, and the 2010 interpretive guidance has been widely criticized for lacking sufficient details on how a company should determine climate “materiality” and how these risks should be measured and reported to stakeholders.
The current Democrat commissioners, acting SEC Chair Lee and Caroline Crenshaw, have advocated for mandatory climate risk disclosure and criticized the SEC’s current “voluntary” principle-based approach as yielding insufficient disclosures that are non-standardized, inconsistent and incomparable. Lee’s term chairing the agency will end when the Senate confirms her successor. Gary Gensler, Biden’s nominee for chairman, is currently awaiting Senate confirmation. It is expected that Gensler will join his Democrat colleagues in pushing for climate change disclosure reform, although what such reform will ultimately look like is currently unknown.
Last week’s directive is consistent with President Joe Biden‘s pledge to address climate change as one of his administration’s top priorities. Biden, who appointed then-SEC Commissioner Lee as acting chair in January, has called for the United States to achieve a 100% clean energy economy and net-zero emissions no later than 2050. Biden has already issued a number of climate-related executive orders, including the creation of a new White House Office of Domestic Climate Policy and a National Climate Task Force, as well as instituting a “pause” on new oil and gas leasing on public lands and in offshore waters pending completion of a comprehensive review of federal oil and gas permitting and leasing practices.
The directive also comes in the wake of increasing investor pressure on public companies, including oil and gas companies, to fully integrate ESG considerations into operations and provide related disclosures in SEC filings. Supporters of more robust climate risk disclosures, for example, argue that companies must better understand potential climate risk and liability, such as supply chain disruption and financial impacts from changing government policies and regulations.
Critics of mandated climate disclosures argue that existing SEC rules already require companies to disclose material risks to investors, including environmental risks, and that requiring more climate-related disclosures would force companies to report highly speculative forecasts of future climate-related risks and liabilities.
The push to establish new climate-related disclosure policies is part of a broader focus on ESG disclosures and is an idea that has increasingly gained traction within the SEC. In May 2020, for example, SEC’s Investor Advisory Committee voted overwhelmingly to approve a recommendation that the agency begin an effort to update the reporting requirements to include “material, decision-useful, ESG factors.” Following that recommendation, the agency’s ESG subcommittee in December issued a number of potential recommendations, including the adoption of standards by which corporate issuers disclose material ESG risks and requirements that material ESG risks be disclosed in a manner consistent with other financial disclosures.
Key takeaway: The SEC’s recent statements signal a coming change for public companies and how they must address climate-related risks going forward, which we expect to be part of a larger focus on ESG disclosures. Any change to climate disclosure obligations will obviously affect companies with energy-related operations (mining, oil and natural gas, industrial and manufacturing). But this change will also force companies not traditionally considered to be in the energy sectors to review their operations to more fully address potential climate-related risks, including supply chain disruptions and environmental justice impacts, as well as other ESG-related factors such as diversity and inclusion issues within internal governance. The team at Brownstein has significant experience helping companies with climate and ESG disclosure issues and will be closely monitoring these very important developments.