Climate-Related Risk Disclosure Under U.S. Securities Laws
September 10, 2019
Climate-Related Risk Disclosure Under U.S. Securities Laws
In light of public concern over climate change, some
Inc. v. Levinson, 485 U.S. 224 (1988), the Supreme Court
stakeholders have asked to what extent publicly traded
explained that a fact is “material” if there is a “substantial
companies should disclose their climate-related risks. The
likelihood” that a reasonable shareholder would find its
Securities and Exchange Commission (SEC) requires
omission to alter the total mix of available information
publicly traded companies to disclose financial statements
significantly. By requiring publicly traded companies to
and certain other relevant business information in public
disclose material information, federal securities law enables
filings, including annual and quarterly reports. While
shareholders to make informed investment decisions.
current SEC requirements do not address climate-related
Subject to this “principles-based” approach to disclosure, a
risks expressly, publicly traded companies must disclose
company’s management must use its judgment in
such risks if they are “material” under federal securities
complying with the “materiality” standard to determine
laws.
what information must be disclosed. Under the securities
laws, investors harmed by materially misleading statements
Financial Risks Posed by Climate Change or the omission of material facts can seek remedies through
Numerous organizations, shareholder groups, businesses,
civil litigation.
and financial regulators have recognized financial risks that
climate change may pose to companies. Such climate-
The SEC’s Regulation S-X and Regulation S-K require
related risks commonly fall into two general categories:
publicly traded companies to disclose certain information,
such as financial statements and business descriptions, in
Physical risks: These risks include direct and indirect
their periodic filings. For example, in the Management’s
risks arising from extreme weather events and from
Discussion and Analysis, or MD&A section of SEC-
longer-term shifts in climate patterns, including, for
mandated public reports, publicly traded companies must
example, changes in water availability and food
provide a narrative explanation of their financial statements.
security. Physical risks have important implications for
The MD&A section also requires disclosure of any known
many companies’ physical facilities, operations,
trends, events, or uncertainties, which are reasonably likely
transportation costs, supply chains, and employees.
to have a material effect on the publicly traded company’s
financial condition or operating performance beyond what
Transition risks: These risks arise from policy, legal,
its reported financial statements reflect. In the Risk Factors
technology, and market changes as the world
section of SEC-mandated periodic reports, a company must
transitions to a lower-carbon economy, with potential
disclose the most significant risk factors that would make
financial or reputational effects on businesses. For
an investment in the company speculative or risky, although
example, a company may engage in efforts to reduce
the rule states that companies should not present risks that
greenhouse gas emissions or otherwise respond to
could apply generically to any security. Moreover, the
changing consumer behavior.
SEC’s Rule 12b-20 requires additional disclosure of “such
further material information, if any, as may be necessary to
Although financial regulators have not traditionally focused
make the required statements, in light of the circumstances
on climate change, some financial regulators have begun to
under which they are made, not misleading.”
consider the economic impact of climate-related changes.
For example, the Bank of England is incorporating climate
In 2010, the SEC issued a Commission Guidance
change scenarios into certain prudential regulation stress
Regarding Disclosure Related to Climate Change to assist
testing processes. Similarly, the Bank of Canada recently
publicly traded companies in satisfying their disclosure
added climate change to its list of the top economic risks
obligations with respect to climate change matters. First, the
facing the country’s financial system, as noted in its 2019
SEC’s guidance reviewed certain explicit disclosure
Financial System Review. In the United States, Federal
requirements concerning environmental matters contained
Reserve Chairman Jerome Powell has stated that climate
within Regulation S-K. Specifically, under Item 101 of the
events “have the potential to inflict serious damage on the
regulation, issuers must report their material costs of
lives of individuals and families, devastate local economies,
complying with environmental laws. Under Item 103,
and even temporarily affect national economic output and
companies generally must disclose environmental litigation
employment.”
that is material, involves damages in excess of 10% of the
company’s assets, or involves a government entity.
What Climate-Related Risk Disclosures
Do the SEC Currently Require?
Next, the SEC provided examples of climate-related risks
Federal securities law does not explicitly require publicly
that a publicly traded company would need to report
traded companies to disclose specific climate-related risks.
(including in the business description, MD&A, or risk
Rather, publicly traded companies need to disclose climate-
factors sections), if they are material:
related risks if such risks are material to investors. In Basic,
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Climate-Related Risk Disclosure Under U.S. Securities Laws
Impacts of enacted or pending environmental
traded companies to disclose their financial strategies under
legislation, regulations, or international accords that
different climate scenarios.
pose a specific risk or a material impact on the
company’s financial condition;
Shareholder Activity. Some shareholders have advocated
for publicly traded companies to make climate-related
Indirect consequences of regulation or business trends,
disclosures. Under SEC Rule 14a-8, shareholders may
such as changes to demand or competition for products
recommend votes on proposed company actions at annual
or services (e.g., decreased demand for goods that
shareholder meetings. In recent years, environmental
produce significant greenhouse gas emissions) or even
proposals have accounted for a significant share of such
relevant reputational effects; and
shareholder proposals. However, companies often exclude
such shareholder proposals from proxy ballots based on the
Significant risks and physical effects of climate-related
SEC issuing a “no-action” letter recommending that no
events such as severe weather.
enforcement action be taken against the company for the
exclusion. In addition to making Rule 14a-8 proposals,
Although the SEC has not updated its 2010 guidance, it
some investors—through groups such as Climate Action
published a “concept release” on Business and Financial
100+, which represents more than 300 institutional
Disclosure Required by Regulation S-K in 2016, in which it
investors—have urged large multinational corporations to
sought public comment on whether shareholders need
make climate-related disclosures using TCFD standards,
sustainability disclosures to understand a publicly traded
improve governance around climate change, and take other
company’s business and financial condition or to participate
climate actions.
in shareholder votes. The SEC’s August 2019 proposal to
amend Regulation S-K does not address climate-related
Should Specific Climate Change
risks.
Disclosures Be Mandatory?
Some proponents of more climate-related disclosures view
Voluntary Climate Disclosures. In addition to mandatory
climate-related risks as having significant, immediate or
disclosures, many publicly traded companies voluntarily
quantifiable impacts on a publicly traded company’s
disclose climate-related information in corporate social
operations and that disclosing such risks aligns with
responsibility or sustainability reports. In making these
shareholders’ interests. Many of these commentators
disclosures, numerous companies use disclosure
contend that imposing a standardized framework for
frameworks developed by standard-setting organizations.
climate-related disclosures would help publicly traded
For example, in 2017, the Financial Stability Board’s Task
companies comply with their obligations and enable
Force on Climate-Related Financial Disclosures (TCFD),
investors and regulators to compare the risks facing
an international industry-led group, released its final
different companies easily. Finally, some observers have
recommendations report, which outlined a voluntary,
argued that enhanced climate-related disclosures could
standardized climate risk disclosure framework for
provide regulators with valuable data in monitoring
companies. According to TCFD’s June 2019 status update,
financial system developments at a macroeconomic level.
more than 800 global organizations have shown support for
the TCFD framework.
Critics of increased climate-related disclosure requirements
question their usefulness and whether reporting frameworks
Proposals for Increased Climate Risk
would capture the complexity of climate-related risks
Disclosures
adequately. They also assert that providing such disclosures
Legislative Proposals. Through hearings and legislative
could increase costs for publicly traded companies—a
proposals, Congress has been considering possible climate-
potentially salient concern in light of the steady decline in
related macroeconomic impacts and environmental, social,
the number of publicly traded companies since the 1990s.
and governance (ESG) disclosures. In the 116th Congress,
Some critics also argue that publicly traded companies’
two bills have been introduced that would require publicly
disclosures should be limited to information relating to
traded companies to disclose specific climate-related
financial performance, viewing additional disclosure as
information in their annual public reports to the SEC. The
furthering social or political interests rather than providing
Climate Risk Disclosure Act of 2019 (H.R. 3623 and S.
necessary financial information. Finally, some stakeholders
2075), which the House Financial Services Committee
believe that the current disclosure regime (i.e., disclosing
ordered to be reported, would require publicly traded
material climate-related risks) is sufficiently flexible to
companies to evaluate the financial effects of climate-
account for the climate-related risks publicly traded
related risks (i.e., both physical and transition risks) and to
companies face.
describe their strategies to mitigate and manage those risks.
The bill would require the SEC to adopt specific disclosure
Related Product
rules for certain industries as well as reporting standards for
CRS In Focus IF11256, SEC Securities Disclosure:
publicly traded companies’ greenhouse gas emissions,
Background and Policy Issues, by Eva Su.
fossil fuel related assets, and the “social cost of carbon.”
The bill would also require the SEC to specify a number of
Eva Su, Analyst in Financial Economics
line-item disclosures related to greenhouse gas emissions
Nicole Vanatko, Legislative Attorney
for publicly traded companies developing fossil fuels
commercially. Finally, the bill would require publicly
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Climate-Related Risk Disclosure Under U.S. Securities Laws
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https://crsreports.congress.gov | IF11307 · VERSION 1 · NEW