RI Comment: Covid-19 is leading to a re-think about corporate scenario disclosure

Pandemic could change the way we think about corporate reporting

US regulators seem to be changing their thinking about how much companies can disclose about their scenario planning amid the Covid-19 outbreak – which could prove a boost for disclosures against the TCFD guidelines.

The Securities and Exchange Commission has asked companies to release “robust, forward-looking disclosures” about the pandemic in an apparent shift in its thinking about what companies should disclose.

“Broad dissemination and exchange of firm-specific plans for addressing the effects of COVID-19 under various scenarios will substantially contribute to our nation’s collective effort to fight and recover from COVID-19” – The SEC

A stumbling block in the take-up of the TCFD [Task Force on Climate-related Financial Disclosures] in the US has been the perception that companies are inhibited from presenting climate scenario analysis, a key feature of the framework, for fear of disclosing “forecasts”, which are prohibited under securities regulations.

It was a point tackled recently by Mark Carney in webcast remarks to the Investor Network on Climate Risk (INCR).

Asked about engagement with the SEC, the former Bank of England governor who was a driving force behind the TCFD, noted that the challenge for companies in the US is how to disclose strategic resilience.

“In other words, forward-looking scenarios that would have an element of safe harbour, because they’re scenarios around certain climate pathways, but not forecasts of business performance.”

Carney added that he’d had a number of productive discussions with SEC Chair Jay Clayton.

Meanwhile, the SEC said last week that “the exchange of forward-looking information is essential” in the fight against the virus.

Clayton and the Director of the SEC’s Division of Corporation Finance, William Hinman, said “robust, forward-looking disclosures” would benefit investors, companies and the general fight against the virus.

They went on to say that 1) the information will benefit investors, 2) market digestion of the information will benefit the company, and 3) that “broad dissemination and exchange of firm-specific plans for addressing the effects of COVID-19 under various scenarios [our emphasis] will substantially contribute to our nation’s collective effort to fight and recover from COVID-19”.

The officials say the first two points need little explanation, but that the third is “less familiar”.

They write that “when a company articulates its strategy publicly, it gives investors and the public a heightened level of confidence and understanding.  This increased confidence and understanding reduces risk aversion and facilitates action”.

The regulators noted the difficulties of corporate reporting at this time but warned against “generic, or boilerplate” disclosures that do little to inform investors of company-specific status, operational strategies and risks. Rather, they want companies to “convey meaningful information”.

Meanwhile, Cyrus Taraporevala, CEO of State Street Global Advisors, has called on corporate boards to communicate to investors COVID-19’s short- and medium-term potential impact including management preparedness and “scenario-planning and analysis”.

And in another development that shows how the thinking around scenario disclosures is evolving, one of the leading corporate law firms in the US, Wachtell, Lipton, Rosen & Katz, has released a memorandum that could help to clarify matters for companies worried about legal action.

The note been put together by Martin Lipton, the influential founder of the firm and the originator of the ‘poison pill’, and colleagues David Silk and David Anders. They make their remarks in a 305-word document entitled ESG Disclosures and Litigation Concerns.

They note that the World Economic Forum’s (WEF) proposed core metrics and recommended disclosures under the auspices of the International Business Council, while seeking to align mainstream ESG reporting, has prompted concern about litigation risks.

“Some companies have expressed concern,” the trio write, “over whether scenario analysis and disclosure of underlying analyses, assumptions and parameters or the failure to consider other plausible climate-related scenarios may lead to heightened securities litigation risks or enforcement actions.”

Another concern is whether “work papers generated by scenario analysis” under the TCFD may be used as a basis to commence or bolster litigation or, indeed, whether ESG-related statements that are later alleged to be “materially inaccurate or misleading” could become the basis for securities litigation.

But the lawyers say that companies that make accurate disclosures and take advantage of the protections available under existing statutory and common law safe harbours are “unlikely to face significant litigation risks from scenario analysis disclosures”.

Citing cautionary statements about scenarios from BP, Ford and AES, they conclude: “If companies make use of existing safe harbours and exert the same degree of care when making ESG scenario analysis disclosures as their other public disclosures, they should not face new or heightened litigation risks.”

Elsewhere, the Banque de France has released a climate change scenario modelling the long-term growth impact of climate change and policies. The model looks at horizons up to 2060 and 2100 and can be used in the context of stress test exercises by financial institutions. 

Taking all these developments together, it seems that the thinking around corporate scenario disclosure seems to be moving rapidly. Perhaps that’s the true fruit of Carney’s discussions with Clayton?