Wednesday, February 10, 2016

GAO: SEC’s Priorities Have Changed Since Climate Change Disclosure Guidance

By Amanda Maine, J.D.

The Government Accountability Office issued a report on how companies disclose climate-related supply chain risks in SEC filings and through other channels. The report determined that the SEC has taken some action to determine if investors need additional information on climate-related risks, but noted that the agency’s plans have evolved since it issued climate-related disclosure guidance in 2010. The report follows up on a request from 34 legislators for an update on the SEC’s efforts to implement the guidance.

Broad categories of disclosure. The SEC’s guidance identified four broad categories of climate change risks and examples of how they could trigger disclosure rules. The first category, legislation and regulation, could include increasing costs faced by companies from improving facilities to reduce emissions to comply with regulatory limits. The second category, international accords, includes the impact of international regulations such as the European Union Emissions Trading System.

The third category, indirect consequences of regulation or business trends, might include a decreased demand for goods that produce a significant number of greenhouse emissions. The final category, physical impacts, would include the impact of severe weather that could cause property damage or disruptions to operations, as well as the impact of weather on major customers or suppliers.

Climate-related disclosure. To identify climate-related supply chain risks which companies disclosed in their SEC filings, the GAO examined EDGAR filings and interviewed SEC staff, as well as reviewed studies by non-governmental organizations. The report found that the SEC does consider climate-related supply chain risks during its routine monitoring activities, including the review of a company’s initial registration, periodic filing reviews, and selective reviews of transactional filings.

The report noted that climate change disclosure advocate organization Ceres has reported that between 2010 and 2013, the SEC sent climate change-related comment letters to 23 companies, 17 of which were sent the year the guidance was issued. According to the SEC staff, the Division of Enforcement has not filed any actions relating to climate disclosure issues.

The report also examined how companies provide climate-related supply chain risk information through channels outside the SEC, including to nongovernmental organizations, on company websites, and in response to reporting requirements in other countries.

Some action taken, but priorities have changed. The SEC’s guidance identified three specific actions it planned to take to determine whether investors need additional information on climate-related risks. The first planned action, monitoring the impact of the guidance as part of its ongoing disclosure review program, has been carried out, the report states. The Division of Corporation Finance studied the issue of climate-related disclosure in 2012 and in 2014 in response to direction from the Senate Appropriations Committee.

The other action items described in the guidance are 1) holding a public roundtable on climate-related disclosure and 2) discussing the issue with the SEC’s Investor Advisory Committee. The SEC has not acted on these items, and the SEC staff is not aware of any current plans to take action on these items, according to the report. The report notes that, at the time the guidance was issued, Congress was considering legislation to establish a cap-and-trade program for greenhouse gas emissions. This legislation was not enacted.

In addition, the report notes that the SEC’s priorities have changed since the guidance was issued. Statutory mandates under the Dodd-Frank Act of 2010 and the JOBS Act of 2012 required an incredible amount of rulemaking by the SEC. The report also advised that the issue of climate change disclosure has not risen to the level of importance of other issues that have arisen in the intervening time, in particular developments and rulemaking under the Dodd-Frank Act.

The report states that the SEC generally agreed with the GAO’s findings.

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