SEC Warning Shot on Climate Disclosure

The acting head of the Securities and Exchange Commission said today that agency staff will start paying more attention to companies’ climate change disclosures, as a prelude to the SEC updating its original climate change guidance now 11 years old. 

Allison Herren Lee, acting chair since the Biden Administration took office in January, released her statement Wednesday afternoon. SEC staff, she said, will “review the extent to which public companies address the topics identified in the 2010 guidance, assess compliance with disclosure obligations under the federal securities laws, engage with public companies on these issues, and absorb critical lessons on how the market is currently managing climate-related risks.”

Lee also expressly said, “The staff will use insights from this work to begin updating the 2010 guidance to take into account developments in the last decade.” Which seems like a clear statement that, yes, the SEC really is going to publish new climate change guidance sometime soon.

I don’t interpret this statement to mean that the SEC’s Enforcement Division will start opening cases against companies for some material omission about climate change risk. But perhaps we could see the SEC Division of Corporation Finance issue comment letters on corporate disclosures by later this year, or some sort of summary report on what the SEC staff has observed. 

For truly substantive motion on climate change disclosures, however, we have to wait for Gary Gensler to win Senate confirmation as permanent SEC chair, because the remaining SEC commissioners are deadlocked at a 2-2 partisan tie. The Senate Banking Committee has scheduled a hearing on Gensler’s nomination for March 2, and he’ll likely be confirmed sometime shortly thereafter. 

The 2010 Climate Guidance

The SEC first adopted guidance around climate change disclosures in 2010, in a directive as watered down as the coast of Greenland amid its melting ice sheet. The 29-page document only tells companies that they should consider how issues related to climate change might affect the disclosures they make to investors in the financial statements.

That 2010 guidance offers some examples of where climate change issues might color existing disclosure obligations — in the risk factors, legal proceedings, and Management Discussion & Analysis, for example. But climate change was not an issue to be disclosed or discussed unto itself. So if a company could reasonably conclude that climate change didn’t affect its business operations and existing risks, the company didn’t have to say anything on the subject. 

That said, the 2010 guidance did list four ways that climate change might affect business operations:

  • The impact of legislation or regulation, such as around greenhouse gas emissions;
  • The impact of international accords (such as the Paris Climate Accords, although that wasn’t adopted until 2016);
  • The indirect consequences of regulation or business trends, such as the move away from plastic supermarket bags or the declining costs of solar energy; 
  • The physical impacts of climate change. I’ll let people in Texas describe that one for the rest of us.

Since then, to the best of my knowledge, the SEC has never taken any enforcement action related to climate change disclosures. 

What Happens Next?

A lot has happened since 2010, and climate change has clearly become a much more pressing, widespread issue for all businesses. 

First, the world now understands how climate change can be a business threat both immediate (extreme weather events that disrupt business operations) and long-term (degrading natural resources or devaluing commercial investments). Investors — especially institutional investors, who prefer to make long-term investments — have a much more sophisticated understanding of climate change risk generally, so it’s natural that they want more disclosure from individual companies about what those risks are specifically.

Second, governments also understand the public policy threats that climate change poses: the droughts leading to famine, the floods leading to displaced citizens, the declining levels of biodiversity that can ruin the food chain, and more. So they’re responding with more precise and forceful policies, specifically the move toward a carbon-free future. 

Those two forces apply to all four points listed in that 2010 climate change guidance. So of course companies should disclose more information about climate change — and many companies do. Sustainability reporting is a booming business these days. 

The question here — the question the SEC and other securities regulators around the world want to answer — is how to formalize those disclosures; how to define materiality in a way that’s practical for the business, useful for the investor, and enforceable across the whole range of public registrants. 

Clearly we would need a disclosure framework to achieve that. So that’s what I’ll be watching for as this debate unfolds in the coming 12 to 18 months: what frameworks might the SEC identify, or suggest, or mandate, for companies to use as the basis of climate change disclosure?  

We could note here that the Sustainability Accounting Standards Board recently merged with the International Integrated Reporting Council; if you wanted to create one dominant voice in sustainability standards, that would be one way to do it. We could also note that just today, the International Organization of Securities Commissions said it will work with the group that develops International Financial Reporting Standards to create a new Sustainability Standards Board — and that Allison Herren Lee applauded the move

In fact, we could note a lot of regulatory movement toward greater disclosure expectations around climate change. You may want to tell your board exactly that. 

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