“We are not opining on whether the world’s climate is changing, at what pace it might be changing, or due to what causes. Nothing that the Commission does today should be construed as weighing in on those topics.” This was what then SEC Chairman Mary Schapiro said in her introductory remarks at the release of the SEC’s Guidance Regarding Disclosure Related to Climate Change in January 2010. As was stressed at the time, no new disclosure rules were being made, the SEC was merely suggesting how climate-related risks and opportunities should be disclosed within existing rules. And this was when Obama was in power and Scott Pruitt was just an environmentalist’s bad dream.
That was more than eight years ago. So, everything’s either going swimmingly and all climate-related risks are being fully and quantitatively disclosed, or little has changed and disclosures are chuntering along at the same rate and with the same quality that they were before the release. Or somewhere between those two extremes.
A report published in March by the Government Accountability Office in response to a request from a group of 11 senators and congress men and women – Climate-Related Risks: SEC Has Taken Steps to Clarify Disclosure Requirements – found, despite its glowing title, that the actual results are closer to the bottom of that range. Yes, the SEC has clarified disclosure requirements, but they continue to be unsatisfactorily complied with and the SEC doesn’t seem to be doing much about it.
Take for example the investigation in 2015 of Peabody Energy by New York State’s Attorney General, which subpoenaed the company’s internal documents only to find that, while Peabody said it was impossible to predict the impact of future climate change laws and regulations on its business, Peabody had done exactly that in internal disclosures; producing market projections showing severe negative impacts. What did the SEC do? Reviewed the additional disclosures Peabody was forced to make following a legal settlement and left it at that; commenting that these disclosures “may not be applicable for other companies”. What? Not applicable for Coca-Cola, sure, but other coal companies? Utilities heavily dependent on coal-fired power generation? Actually, it might might be fairly applicable to those. Any further action taken? Enforcement? Fines for lying to shareholders? Nothing.
So what did the guidance tell companies to do? It opined that disclosures should be made in four distinct areas already required by Regulation S-K: description of the business, legal proceedings, risk factors, and management’s discussion and analysis. Within these, the categories of climate-related risks could cover: legislation and regulation, international accords, indirect consequences of regulation or business trends, and physical impacts
In 2017, the GAO was asked to review: the steps the SEC has taken to clarify to companies their disclosure requirements for climate-related risks, what it has done to examine changes companies may have made to their climate-related disclosures since 2010, the constraints it faces when reviewing climate-related disclosures, and stakeholders’ views of those disclosures.
In fact, the SEC issued two reports to the Senate Appropriations Committee in 2012 and 2014 that examined changes in climate-related disclosures in select industries following the issuance of the guidance.No one seems willing to share those with me, neither the GAO, nor the SEC, nor the Appropriations Committee. They were both called: Staff Report to the Senate Committee on Appropriations Regarding Climate Change Disclosure. If anyone has copies, I’d love to see them. The Appropriations Committee said they were internal, though I queried why a report from one public servant to another would not be public. I received no answer. The GAO suggested the SEC Freedom of Information, which is not ‘free’ but costs a minimum of $61.
The GAO provided a very brief summary of the two reports. Of most interest was the fact that: “they did not find any notable year-to-year changes in the disclosures reviewed from the year before the 2010 Guidance to the year after.” Unfortunately, the GAO does not say whether that was still the case four years after the guidance.
Additionally, in April 2016, the SEC issued a Concept Release requesting input on modernising certain disclosure requirements, including those relating to climate risks. Also, in July last year, a Republican congressman from Florida presented a bill ordering the SEC to withdraw the interpretive guidance. It has gone nowhere thus far, but with Trump in power, you never know.
But how effective has the guidance been anyway? The GAO found that the SEC faced some problems in reviewing the relevant disclosures. “When companies report climate-related disclosures in varying formats and specificity,” said the report, “SEC reviewers and investors may find it difficult to compare and analyze related disclosures across companies’ filings.” That sounds like an understatement if I ever heard one; especially as, in a later section on training, it was noted that while there was training in reviewing these disclosures, it was neither very detailed, nor regular.
Unsurprisingly, when the GAO spoke to representatives of industry associations for the sectors it was focusing on – oil and gas, mining, insurance, electric and gas utilities, and food and beverage – these representatives “told GAO that they consider the current climate-related disclosure requirements adequate and no additional climate-related disclosures are needed”. Other stakeholders, such as investor groups and asset management firms, were less sanguine and wanted more climate-related information.
In addition to talking to shareholders and industry groups, the GAO assessed the effectiveness of the guidance by interviewing senior SEC staff, reviewing comment letters from 2010 to August 2017, reviewing the April 2016 Concept Release and public comments on this, and examining actual company disclosures.
The Sarbanes-Oxley Act requires the SEC to review company financial statements at least once every three years, though, according to the SEC, “the financial statements of a significant number of companies” are reviewed “more frequently”. Commenting on these reviews, the report said: “Given that SEC reviewers primarily rely on information companies disclose in filings, it may be difficult to determine whether a low level of disclosure indicates that the company does not face any climate-related risks or does not consider the risks to be material.” Or, and for some reason this is unsaid, the SEC can’t tell whether companies are simply not disclosing risks, whether they are material or not. Indeed, the GAO report cites data compiled by SASB in October 2016 that concludes that climate-related disclosures are woefully inadequate.
The SEC issues comment letters to companies if it finds something amiss during its reviews. Using statistics from CERES and examining the comment letters itself, the GAO found that only around 37 comment letters out of 96,000 sent out in the period related to climate-related disclosures, with the numbers declining every year. This seems barely credible.
The report concludes, somewhat optimistically, that the SEC has given guidance and has clarified the disclosure requirements. It notes that the SEC has said it has no plans to change or revise the guidance, or issue any new guidance. It has also said that it does not plan to make any changes to Regulation S-K regarding climate-related disclosures based on comments received following the Concept Release.
The request to the GAO was not the first time that the SEC’s effectiveness in enforcing the disclosures has been called into question. Coordinated through CERES, in April 2015, an alliance of 62 institutional investors wrote to the SEC requesting a higher level of scrutiny of climate-related disclosures, particularly for energy companies.On the same day, the New York City and New York State comptrollers wrote a similar letter. In October that same year, 35 Democratic members of Congress also wrote to the then SEC chairwoman, Mary Jo White, to ask for an update on the 2010 guidance, intimating that the Commission had taken its eye of the ball since then. None of this resulted in any change.
It does not help that the SEC’s Investor Advisory Committee appears not to be able to decide what it wants either, despite session after session on climate disclosures. And the SEC itself is not commenting. I submitted a series of detailed questions: is anyone checking compliance, how often are climate risks discussed, have there been any fines for non-compliance, any plans to revise the guidance, has the Investor Advisory Committee published anything specifically about the guidance.
The guidance says: “We will monitor the impact of this interpretive release on company filings as part of our ongoing disclosure review program.” Is any of that publicly available? The SEC’s response? Read the GAO report.