[co-author: Edward Mahaffey]
Corporate disclosures regarding climate change impacts are becoming more prevalent, although not yet universal, and their adoption has been a relatively slow process. We discuss below the impact on corporations of increased pressure from the environmental, social, and governance (ESG) movement; financial institutions; and investment management firms to disclose climate-related risks and to fulfil sustainability and climate commitments.
U.S. securities laws generally require public companies to disclose a fact if it is “material,” that is, “if there is a substantial likelihood that a reasonable shareholder would consider it important.” The application of this general principle to climate change-related information remains unclear; lacking directly applicable regulatory guidance or case law, corporations hesitate to disclose new types of information. The U.S. Securities and Exchange Commission (SEC) voted, in August 2020, to change its rules for risk factor disclosures that registrants must make pursuant to Regulation S-K, but it declined to include anything specific regarding the disclosure of climate-related risks. The Commissioners deemed such regulatory directives inconsistent with the principle-based approach of the revised regulations. This decision provoked criticism, including from Sen. Elizabeth Warren (D-Mass.), who critiqued SEC Chairman Jay Clayton for failing to enact a “mandatory, uniform standard for reporting on climate risk,” in light of the seriousness of the “climate crisis.” In a later speech, Clayton defended the SEC’s decision on the grounds that environmental risks “are very company-specific and sector-specific issues,” in addition to the uncertainty inherent in forward-looking assessments of corporate performance.
Corporations may weigh the risks: on one hand, of lawsuits for failure to disclosure business-related climate risks; on the other hand, of lawsuits from investors who deem the information disclosed misleading. Although such shareholder derivative lawsuits have been called an emerging area of litigation, thus far, no shareholder suit alleging that a company made misleading statements regarding climate risks has succeeded. Nonetheless, American corporations may feel uncertain about which path to take.
In the United Kingdom, however, in December 2019, the Bank of England imposed strict rules regarding the disclosure of financial risks from climate change. According to the BBC, "Large banks and insurance groups will be asked to go through their balance sheets almost asset by asset to assess the risks posed by a range of climate scenarios." Although the U.S. Federal Reserve has not imposed any similar regulations yet, its Chairman has commented that the Fed eventually must play some role in protecting the financial system from climate-related risks. The Federal Reserve may have begun that process in November 2020 by including climate change on a list of major risks to financial stability.
The Office of the Comptroller of the Currency (OCC), on the other hand, has proposed a rule that may make it harder for banks to take climate-related risks into account in their decision-making. The proposed rule would forbid a large bank from denying “any person a financial service the bank offers except to the extent justified by such person’s quantified and documented failure to meet quantitative, impartial risk-based standards established in advance by the covered bank,” which the OCC described as requiring “individual, rather than category-based, customer risk evaluation.”
The Broader Context: ESG
Efforts to promote climate disclosures are part of a broader movement to incorporate "environmental, social, and governance" (ESG) concerns into investment decisions. Originating in 2004, the ESG movement differs from the earlier “socially responsible investment” movement in its assumption that these factors are financially, not only ethically, relevant, a view supported by research published circa 2014. Several information services evaluate companies based on a series of ESG metrics for the benefit of investors. Some asset managers and large investors, such as BlackRock and The Vanguard Group, offer funds and invest in portfolios that are developed based on similar research. According to the Forum for Sustainable and Responsible Investment, US investments accounting for ESG or similar sustainability principles currently total $17.1 trillion – a 42% increase since 2018, and a third of US investments under professional management.
Aside from climate change, ESG issues include non-climate environmental impacts, working conditions, executive compensation, and corruption. Climate change, however, has become the most prominent ESG issue from the perspective of investors.
The ESG movement is supported and in large part was started by the United Nations, via its support for the Principles for Responsible Investment and the Sustainable Stock Exchange Initiative. Ceres, a nonprofit organization, also has worked tirelessly to promote ESG, and convince companies to fulfill obligations consistent with the Paris Agreement. This effort likely will gain additional traction following the announcement by President-elect Biden of his intention that the United States rejoin the Paris Accord. Biden has also promised to require all public companies to disclose their climate-related risks as well as their greenhouse gas emissions outputs, although the details of how he would implement this are still uncertain.
Investment Company Influence on Disclosure
Other recent developments promoting climate disclosures include the actions of BlackRock. In January 2020, BlackRock’s Global Executive Committee sent a letter to clients, which declared, "We believe that sustainability should be our new standard for investing." It presented this new focus as a matter of minimizing financial risk to investors rather than broader ethical considerations: “more and more of our clients have focused on the impact of sustainability on their portfolios…driven by an increased understanding of how sustainability-related factors can affect economic growth, asset values, and financial markets as a whole.” Most significantly, climate change presents not only “physical risk associated with rising global temperatures, but also transition risk – namely, how the global transition to a low-carbon economy could affect a company’s long-term profitability.”
BlackRock’s announcement of its enhanced focus on sustainability was less sweeping than its rhetoric might suggest, but nevertheless was significant. For example, the letter announced, "This year we will begin to offer sustainable versions of our flagship model portfolios," which "will use environmental, social, and governance (ESG)-optimized index exposures in place of traditional market cap-weighted index exposures." Although the existing flagship models will continue to be offered for the time being, BlackRock predicts, “[o]ver time, we expect these sustainability-focused models to become the flagships themselves.” BlackRock also declared its intent “to provide transparent, publicly available data on sustainability characteristics – including data on controversial holdings and carbon footprint – for BlackRock mutual funds.”
BlackRock’s CEO, Laurence Fink, also sent a client letter in early 2020, demonstrating that BlackRock’s commitment to sustainability and related transparency was backed by a concrete threat: “we will be increasingly disposed to vote against management and board directors when companies are not making sufficient progress on sustainability-related disclosures and the business practices and plans underlying them.” To emphasize the credibility of BlackRock’s threat, the letter noted that, in 2019, “BlackRock voted against or withheld votes from 4,800 directors at 2,700 different companies.”
BlackRock is omnipresent. It had over $7 trillion of assets under management as of June 2020, more than any other asset manager in the world, giving it influence over 1,800 companies. Unsurprisingly, as discussed below, the institution’s very public posture has influenced companies in its orbit to reconsider their approach to climate-related disclosures and, in some cases, to make a greater commitment to reduce greenhouse gas emissions.
Corporate Reactions: Disclosure
BlackRock’s letters appear to have influenced corporate disclosures. For example, in their 2019 SEC 10-K forms, five large energy companies in which BlackRock had invested each disclosed for the first time sustainability-related risk factors or made similar disclosures directly responsive to CEO Fink’s letter. Apache Corporation stated that “[c]hanges to existing regulations related to emissions and the impact of any changes in climate could adversely impact our business,” as could “[n]egative public perception regarding us and/or our industry resulting from, among other things, concerns raised by advocacy groups about hydraulic fracturing, waste disposal, oil spills, and explosions of natural gas transmission lines.”
Similarly, Baker Hughes admitted, “Compliance with, and rulings and litigation in connection with, environmental and climate change regulations and the environmental and climate change impacts of our customers’ operations may adversely affect our business and operating results.” The company acknowledged that the risk is not solely regulatory, but may include such “risks to our operations and those of our customers” as “extreme variability in weather patterns such as increased frequency of severe weather, rising mean temperature and sea levels, and long-term changes in precipitation patterns.”
Corporate Reactions: General Climate Policies
Shortly after BlackRock circulated its letters, several companies in which BlackRock owned 5% or more of the common stock announced new climate-related policies. For example, in February 2020, BP announced a goal of net zero carbon emissions by 2050. BP also announced plans to “Install methane measurement at all BP’s major oil and gas processing sites by 2023 and reduce methane intensity of operations by 50%.”
Moreover, Microsoft announced plans to become carbon negative by 2030 and to eliminate its historical carbon emissions by 2050. Microsoft intends to implement these goals through rigorous quantification of its emissions impacts, including making “carbon reduction an explicit aspect of our procurement processes for our supply chain” beginning in 2021. Microsoft acknowledged that its achievement of “carbon neutrality,” i.e., to “offset their emissions with payments either to avoid a reduction in emissions or remove carbon from the atmosphere,” has been inadequate. “In contrast, ‘net zero’ means that a company actually removes as much carbon as it emits.”
The Vanguard Group, another major asset manager, also acted publicly in 2020 by supporting shareholder actions requiring that United Parcel Service, J.B. Hunt Transport Services, and Ovintiv limit their greenhouse gas emissions.
On the other hand, the ESG-focused nonprofit organization Majority Action criticized both BlackRock’s and Vanguard’s actions in 2020 as inadequate, arguing that both companies “voted overwhelmingly against the climate-critical resolutions at S&P 500 companies.” Christopher Hohn of The Children’s Investment Fund Foundation expressed similar sentiments in October 2020 regarding the asset management industry, including BlackRock and Vanguard. A report by ShareAction, an organization advocating socially responsible investment, found that from September 2019 to August 2020, BlackRock and Vanguard supported only 11% and 15%, respectively, of shareholder resolutions to combat the effects of climate change.
Controversy also was sparked when the European Commission hired BlackRock to study the integration of “environmental, social and governance” objectives into European Union banking rules. In May 2020, the European Ombudsman opened an inquiry into the European Commission’s hiring decision after European Parliament members questioned BlackRock’s impartiality, due to its investments in the banking industry.
The efforts of investment management companies are among the latest to pressure corporate America to address climate change and its business risks, and among the first taken by major shareholder-side entities. In particular, the BlackRock letters seem to have spurred some companies to make more forthcoming climate-related disclosures and pursue enhanced commitments to reduce greenhouse gas emissions from their operations. However, the impact of the ongoing pressure placed on companies by NGOs, government organizations and others, such as Ceres, the Task Force on Climate-Related Financial Disclosures established by the G-20 Financial Stability Board, and the Bank of England should not be underestimated. While some skepticism may be warranted regarding the likelihood of sustained corporate action to address climate risks, the move by some companies towards greater transparency by disclosing business-impacting climate risks may become a trend that would be difficult to reverse.
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 TSC Indus. v. Northway, Inc., 426 U.S. 438, 449 (1976).
 Hana V. Vizcarra, “The Reasonable Investor and Climate-Related Information: Changing Expectations for Financial Disclosures,” 50 ELR 10106 (Feb. 2020).
 https://www.sec.gov/rules/final/2020/33-10825.pdf, 42-43.
 https://www.federalreserve.gov/publications/files/financial-stability-report-20201109.pdf, 58.
 https://investor.apachecorp.com/node/38346/html, 21.
 https://investors.bakerhughes.com/node/23176/html, 14.
 Id., 15.