Publicly traded companies are required to disclose material business risks to investors through regular filings with the Securities and Exchange Commission. Since February 8, 2010, the SEC has expressly required disclosure related to climate change.
While it has been controversial, the SEC’s 2010 interpretive guidance, the Commission Guidance Regarding Disclosure Related to Climate Change, which technically did not create a new legal obligation, but clarified how publicly traded corporations should apply existing SEC disclosure rules to certain mandatory financial filings with the SEC regarding “the risk that climate change developments may have on their business” remains unchanged since it was issued.
Specifically, the SEC Guidance states what companies could be required to disclose in relation to climate change under the corporate disclosure requirements that fall under the SEC’s Regulation S-K, including Forms 10-K annual reports.
In 2010, immediately after the SEC guidance, this law firm worked with a large number of publicly traded companies and their counsel and outside consultants to advise them about climate change. That year more than 25% of public companies used the term “climate change” in their annual report, most for the first time.
Data culled from filings of public companies listed on U.S. stock exchanges reveals that last year less than 30% of all publicly traded companies made a climate change disclosure. That number is dramatically higher for larger companies with 59% of S&P 500 companies including a climate related disclosure in their 10-K filings.
But I suggest that the less than complete response by companies is not out of ignorance, but rather is a knowing voluntary election by company management supported by boards of directors.
In point of fact, in 2016 this law firm received more inquiries than any year before about SEC disclosure requirements as they apply to climate change. The number of inquiries has grown each years since 2010 and actually more than doubled since 2015. Possibly the publicity over the effective date of the Paris Climate Agreement or state’s public efforts to comply with the EPA power plant rule, resulted in the heightened interest we have experienced. And I have written in this blog about More Robust Enforcement of SEC Climate Change Disclosures.
Most dramatic, of the public companies this firm assisted with SEC disclosure requirements, those companies making a disclosure in Forms 10-K and 20-F filings dropped by more than 20% from last year.
And public companies are saying less. Those that have notes explaining the possible material impact of climate change are using, on average, more than 50% fewer words on the subject.
It should not be surprising that many companies report a general lack of interest in the subject of climate change from investors and the financial community at large.
After analysis, many companies concluded disclosing climate change associated information was uncertain and speculative when compared to other disclosures being made. Many companies observed that the process for reaching conclusions about climate change did not have any recognized standards. And the administrative and compliance costs of providing the evaluating a possible disclosure could be significant.
Many public companies determined there were no meaningful business opportunities arising from climate change disclosures, but that they carried a potential for creating risk. Wherefore, an increasing number of companies concluded there was little upside and more possible downside in climate change disclosures.
So, those companies that we worked with making a climate change disclosure in Forms 10-K and 20-F filings dropped by more than 20% from last year.
Disclosure of material risk arising from climate change poses an ongoing challenge for public companies. At the close of 2016, there is no consensus on when such risks should be disclosed and how much detail should be included in SEC filings. While the response to the SEC’s 2010 interpretive guidance has been more activity in this area, few think it has resulted in any greater transparency that aides investors.
It can be anticipated that a Trump Administration will move to determine if the SEC climate change guidance results in disclosures that continue to provide useful information to investors? If not, the guidance could be withdrawn and there will be less climate change disclosure.
We assist public companies in legal and non-law matters associated with climate change and sustainability, including voluntary environmental reports, as well as SEC disclosures and financial statement compliance. If we can assist your company, please contact Stuart Kaplow.