If you are a publicly traded company, what exactly are your risk disclosure requirements under the Security and Exchange Commission (SEC)? Environmental reporting is governed by three items in SEC’s S-K regulation, found at 17 CFR 229.101 to 229.915. Companies often encounter problems in determining which information should be reported and which can legally and responsibly be omitted from reports. The SEC recently published a “concept release” considering major changes to Regulation S-K. Today we will look some of these changes the SEC is considering that could have a significant impact on climate disclosure requirements. Tomorrow we will explore how “green bonds” can influence a company’s environmental compliance efforts.
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Note. The SEC publishes concept releases to solicit the public’s views on issues in order to evaluate the need for future rulemaking.
Check the December 10, 2015 Advisor for SEC’s current interpretation about reporting climate change risks.
The purpose of corporate disclosure is to provide investors with information they need to make informed investment and voting decisions. Companies are increasingly being urged to disclose their financial risks related to climate change. For instance, the California Public Employees’ Retirement System (CalPERS), the largest public pension fund in the country, is calling on companies it invests in to “provide accurate and timely disclosure of environmental risks and opportunities associated with climate change.”
Also, according to Ceres, a nonprofit network of investors, companies, and advocacy groups involved in sustainable leadership, shareholder pressure is driving companies to disclose climate risks. In a notable development, the SEC recently ruled that Exxon Mobil must allow a shareholder vote on whether the company must publish an annual assessment of the long-term portfolio impacts of public climate change policies.
Clearly, costs or penalties resulting from environmental regulations, violations, litigation, and site remediation obligations can have a major impact on a company’s value.
Trouble with the Current Rules
According to the SEC, it has received several comment letters in response to disclosure modernization efforts that specifically mentioned climate change disclosure. Many of these commenters expressed concern that disclosures made in response to the agency’s current rules do not adequately address the risks associated with climate change. Some commenters cited specific risks that they believe are not adequately disclosed, such as stranded assets and regulatory risk. Other commenters referenced SEC’s 2010 Interpretive Guidance on Climate Change and stated that registrants are not following that guidance.
Generally speaking, there is a consensus among commenters and groups—such as Ceres—that regulatory risks posed by climate change are investment issues. The SEC points to recent studies that have found that asset managers increasingly incorporate or have committed to incorporating environmental, social, and governance considerations into their financial analyses.
Changes Under Consideration
As part of the concept release, the SEC is requesting comments concerning climate-related disclosure considerations. These include:
- Whether current climate change-related disclosures are insufficient;
- Whether existing disclosure requirements are adequate to elicit the information that would permit investors to evaluate material climate change risk;
- Additional disclosure requirements or guidance that would be appropriate to elicit that information;
- Adopting new line-item disclosure requirements for climate change matters;
- Adopting a requirement to disclose anticipated full-cycle costs of future capital expenditures and a requirement to disclose the carbon content of a registrant’s reserves and resources;
- Requiring oil and gas companies to disclose carbon costs alongside the company’s disclosure of proved reserves; and
- Requiring an annual reporting to the registrant of the risks of the effects of climate change, if any.
Comments on the S-K concept release are due to the SEC on or by July 21, 2016.
Are you trying to figure green strategies into your compliance costs? Tune in to tomorrow’s Advisor for recent developments in the use of green bonds and how it can affect your compliance efforts.