In March, the Securities and Exchange Commission (SEC) alerted the public it was seeking input on its requirements for Environmental, Social, and Corporate Governance (ESG) disclosures by corporations. Increasingly investors base their decisions on the climate and environmental impacts of companies. According to Forbes, investments that consider "ESG issues now represent one in every four dollars invested in the US and has risen to nearly $23 trillion globally."
Additionally, the SEC notes that "Since 2010, investor demand for, and company disclosure of information about, climate change risks, impacts, and opportunities has grown dramatically." This, in turn, raised questions about the adequacy of corporate ESG disclosures to inform investors about known material risks, uncertainties, impacts, and opportunities. The SEC also created a task force to focus on violations of Climate and ESG disclosure requirements to address investor concerns.
In response to the request for public comment, the Duke University Climate Risk Disclosure Lab, Americans for Financial Reform Education Fund/Public Citizen, and the National Whistleblower Center all filed recommendations with the SEC identifying the need for stronger whistleblower protections as a critical component to any successful ESG reporting rule.
The basic program recommended by the above-referenced organizations is entirely consistent with Congress's intent to incentivize whistleblowers and use whistleblower disclosures to help enforce the law. These basic concepts are:
In rules adopted in September of 2020, the SEC mandated that any whistleblower seeking a reward under the Dodd-Frank Act must file a TCR within 30-days of any communication with any SEC employee or department. Therefore, the ESG rule should not only establish a clear channel for employee reporting to the Commission, but it must also include specific instructions to employees regarding the TCR filing process.
The SEC can direct employees to other potential programs outside of the Commission to review their allegations after the employee first files a TCR form with the SEC. These programs could include a corporate compliance program. However, to fulfill Congress's clear intent to encourage direct reports to the SEC, any such non-SEC reporting can only be encouraged after filing an initial claim SEC. Significantly, the U.S. Chamber of Commerce, and other members of the regulated community, all strongly urged the Supreme Court to require initial reporting to the SEC for an employee to be covered under the Dodd-Frank Act. No regulated company urged the Court to protect or cover non-SEC filings under the Dodd-Frank Act. Thus, to be consistent, the regulated community should also endorse a mandatory SEC-reporting process for employees.
The "related action" concept is a perfect fit for policing climate-related crimes. When a company violates a climate disclosure rule, these violations may also impact actual environmental violations within the jurisdiction of the EPA. For example, an oil company may make false disclosures to the public and investors about their environmental compliance. That same company may also have covered up or committed specific environmental violations (such as oil spills) within the jurisdiction of the EPA.
The SEC must ensure that whenever a climate-related disclosure may also impact a "related action" violation, the Commission takes affirmative steps to ensure that the whistleblower's information is provided to the sister regulatory or law enforcement agency. The sharing of the whistleblower's information confirms that the fraudster(s) can be held fully accountable.
As demonstrated by the above analysis, the Commission should use its discretion to implement the whistleblower program in a manner that fulfills the policy of the United States to combat climate change and enforce laws, rules, and regulations designed to protect the economy and the public from the adverse impacts of climate change. Strengthening the requirements for ESG disclosures by corporations will also protect investors who rely on them.