SEC and G20 Financial Stability Board Seeking Comment on Climate Risk Disclosure Requirements
Corporate disclosure of climate change-related risks, impacts, and opportunities (collectively "Climate Risk(s)") is an increasingly important consideration for investors. In the past few weeks, both the U.S. Securities & Exchange Commission (SEC) and the G20 Financial Stability Board’s (FSB) Climate Change Risk Task Force have asked for public comment on what reforms may be necessary to (i) establish and clarify reportable Climate Risk metrics, and (ii) enhance the utility of Climate Risk disclosure to investors.
SEC’s “Concept Release” on Potential Reforms to Regulation S-K
On April 13, SEC issued a “concept release” as part of its Disclosure Effectiveness Initiative, which is tasked with modernizing and updating certain business and financial disclosure requirements under SEC Regulation S-K1. The release focuses on a wide array of issues and seeks to initiate broad-based reforms to the scope and content of periodic filings required of public companies (known as registrants) in different economic sectors.
SEC lumps disclosure of Climate Risks together with the broader range of environmental and social governance (ESG) issues that could be subject to enhanced disclosure requirements. Noting that some investors have urged greater disclosure of Climate Risks, SEC seeks feedback first on what level of disclosure is “important to an understanding of a registrant’s business and financial condition and whether there are other considerations that make these disclosures important to investment and voting decisions.” SEC is also seeking feedback, however, on the potential challenges and costs associated with compiling and disclosing this information.
SEC explains that companies and investors across the world are seeking to understand and assess the financial implications of a company’s environmental performance. Investors have repeatedly commented to SEC staff that registrants are not following the 2010 Interpretive Guidance on Climate Change, and have “cited specific [Climate Risks] that they believe are not adequately disclosed, such as stranded assets and regulatory risk.” Referencing a 1975 SEC decision, the SEC states that current disclosure of Climate Risks has generally been viewed as being required “only if such information…is important to the reasonable investor – material information,”2 noting that some commenters “…opined that these issues ‘are not typically material to an understanding of the company’s financial performance’ and therefore are not appropriate for inclusion in [Regulation S-K] reports.” However, the SEC acknowledges that the concept of “materiality” may be changing on the topic of Climate Risks, as some investors are increasingly incorporating Climate Risk management into its considerations. Large institutional investors and other financial institutions, for example, now recognize there is potential for great financial risk attendant to corporate responses to climate-related regulatory, business and physical risks.
SEC therefore asks for input on the following:
- Are existing disclosure requirements adequate to elicit the information that would permit investors to evaluate material Climate Risks? Why or why not? If not, what additional disclosure requirements or guidance would be appropriate to elicit that information?
- Are there specific sustainability or public policy issues are important to informed voting and investment decisions? If so, what are they?
- If SEC were to adopt specific disclosure requirements involving sustainability or public policy issues, how could SEC rules elicit meaningful disclosure on such issues?
- Are there sustainability or public policy issues for which line-item disclosure requirements would be consistent with the SEC rulemaking authority and its mission to protect investors, maintain fair, orderly and efficient markets and facilitate capital formation?
- What, if any, challenges would registrants face in preparing and providing Climate Risk information?
- What would be the additional costs of complying with sustainability or public policy line-item disclosure requirements, including the administrative and compliance costs of preparing and disseminating disclosures, beyond the costs associated with current levels of disclosure?
- Would line-item requirements for disclosure about sustainability or public policy issues cause registrants to disclose information that is not material to investors?
- Would these disclosures obscure information that is important to an understanding of a registrant’s business and financial condition? Why or why not?
- How important to investors is integrated reporting, as opposed to separate financial and sustainability reporting?
- If SEC permitted registrants to use information on their websites to satisfy any ESG disclosure requirement, how would this affect the comparability and consistency of the disclosure?3
FSB Task Force on Climate-related Financial Disclosures
The SEC’s Concept Release dovetails with a larger, global effort to increase required disclosure of Climate Risk information. In December 2015, the G20 nations’ Financial Stability Board (FSB) signaled its growing interest in Climate Risk by creating the Task Force on Climate-related Financial Disclosures, a group of financial institutions, accounting firms, and rating agencies.. The Task Force is charged with both assessing the current state of climate-disclosure requirements around the world, and crafting recommendations for voluntary disclosures that will increase transparency and ensure that financial institutions have access to useful data.
On April 1, 2016, the Task Force issued its Phase I Report. The report surveys current climate-disclosure initiatives, defines the Task Force’s objectives, and articulates the following seven principles necessary for an effective climate-disclosure regime:
- Present relevant information.
- Be specific and complete.
- Be clear, balanced, and understandable.
- Be consistent over time.
- Be comparable among companies within a sector, industry, or portfolio.
- Be reliable, verifiable, and objective.
- Be provided on a timely basis.
While the Task Force highlighted progress by some governments and non-governmental organizations in promoting climate-related disclosures, it concluded that reporting regimes remain fragmented, and that few focus sufficiently on the financial risks posed by climate change. A Phase II Report to follow later this year will apply these lessons as the Task Force crafts voluntary climate disclosures that can be incorporated into financial reports. The recommendations will pertain to the physical and non-physical impacts of climate change, and will focus foremost on issuers of public securities, listed companies, and certain financial-sector participants.
The Task Force hopes that its focus on building consensus will encourage adoption of its future recommendations. To accomplish this objective, the Task Force is soliciting input from stakeholders, including businesses, academics, and non-governmental organizations. As part of this consultation process, commenters will have an opportunity to identify the types of financial institutions that should participate in the disclosure regime, the specific information that should be included in the disclosures, and examples of existing climate-disclosure practices that are most effective.
These two Climate Risk disclosure initiatives are part of a rapidly growing trend that spans corporate and investment disclosures, shareholder activism, and possible national and global reporting requirements. Interested stakeholders should consider participating actively in both the SEC “concept release” docket and the Task Force initiative.
Drafting Public Comments to SEC and FSB Task Force
Comments on the SEC Concept Release questions will be due 90 days after publication in the Federal Register, approximately early- to mid-August. SEC is seeking any and all comments to assess whether disclosure rules continue to provide the information that investors need to make informed investment and voting decisions and whether any of our rules have become outdated or unnecessary. Next steps could include proposed revisions to Regulation S-K or additional guidance on the scope and depth of required corporate disclosure of Climate Risks.
The FSB Task Force, on the other hand, is seeking comments by May 1, 2016. A questionnaire is posted on the Task Force website that asks for input on the Phase I Report, which is available here. Comment letters will also be accepted.
1 Business and Financial Disclosure Required by Regulation S-K, Release No. 33-10064 (April 13, 2016) (2016 Financial Disclosure Concept Release).
2 See Environmental and Social Disclosure, Release No. 33-5627 (Oct. 14, 1975) [40 FR 51656 (Nov. 6, 1975)] (1975 Environmental Disclosure Release).
3 2016 Financial Disclosure Concept Release at 213–15.
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