Wednesday, March 28, 2018

GAO report outlines SEC climate-related disclosure issues

By Amanda Maine, J.D.

The Government Accountability Office has issued a report analyzing the steps the SEC has taken to clarify disclosure requirements on climate-related risks. The report, which publicly released last week, outlines guidance issued by the SEC on climate-related disclosure. While the report found that the SEC does have mechanisms, tools, and resources to help its staff consistently review filing disclosures, it also faces constraints in reviewing climate-related disclosures because it primarily relies on information provided by the companies themselves. The report also surveyed industry and investor groups and found that they have mixed views on the amount and specificity of climate-related disclosures.

Guidance and reports. The SEC issued guidance in 2010 identifying four areas of Regulation S-K most likely to require climate-related disclosures in companies’ annual filings: description of business; legal proceedings; risk factors; and MD&A. It also identified four areas of risk that could trigger the disclosure rules: legislation and regulation (such as increasing costs as a result of compliance with emissions rules); international accords (such as the EU Emissions Trading System); indirect consequences of regulation or business trends (such as a decreased demand from the public for products that produce significant greenhouse emissions); and physical impacts (such as severe weather disrupting customers and suppliers).

In addition to the 2010 Guidance, SEC staff has presented information on climate-related disclosure at webinars and other public events. It has also issued individual comment letters to specific companies on their climate-related disclosures. The SEC also issued reports to Congress in 2012 and 2014. In both reports, SEC staff found that most of the filings they examined included some level of climate-related disclosure. The SEC’s 2016 concept release on modernizing Regulation S-K disclosure sought input on the effectiveness on its disclosure requirements, including climate-related disclosures.

Company information. The report identifies a number of constraints the SEC faces in reviewing climate-related disclosures, especially its reliance on information that the companies themselves determine is material. SEC staff may not have access to the detailed information that companies use to arrive at the determination of whether certain risks must be disclosed in their filings, and the staff of the Department of Corporation Finance, which conducts the filing reviews, does not have the authority to subpoena companies’ information.

The report noted that an investigation of Peabody Energy by the New York Attorney General noted that the company’s public statements denied that it had the ability to reasonably predict the impact of future climate change laws and regulations. However, the Attorney General was able to subpoena Peabody Energy’s internal documents, which showed that the company had made market projections showing severe negative impacts from potential legislation that it had not disclosed to the public.

Disclosures vary in format and specificity. According to the report, climate-related disclosures vary in format and specificity, which can make it difficult for SEC reviewers and investors to compare and analyze climate-related disclosures across companies’ filings. The report reviewed examples of climate related disclosures in the annual filings of 116 S&P 500 index companies across five industries: oil and gas, mining, insurance, electric and gas utilities, and food and beverage. As an example of the variety in the format of climate disclosures, the report cites one beverage company which reported its goal to reduce greenhouse gas emissions in its business description section; while another beverage company put its goal on carbon footprint reduction in the risk factors section. It also noted that some companies used boilerplate, unquantified language not specific to the company for its climate-related disclosures.

Investors and industry views. Investor and industry groups interviewed for the report predictably had different views about whether additional climate-related disclosures are needed. Three large asset management firms said they are committed to encouraging companies to make more climate-related disclosures. Two investor groups, the Council of Institutional Investors and Ceres, told the GAO that information on environmental risks, including climate risks, has become more significant for investors and companies and echoed concerns that current disclosures are generally not comparable across companies’ filings.

Not all investors are in agreement that more climate-related disclosures are needed, the report found. Some subcommittee members of the SEC’s Investor Advisory Committee identified climate-related disclosures as a priority issue, but the subcommittee itself did not reach agreement on this issue, the report noted.

Industry representatives feel that the current requirements for climate-related disclosure are adequate, according to the report. Such additional disclosures are not needed because they should only be included in SEC filings if they are material. The report also noted that some companies are providing climate-related information outside of their SEC filings.

Staff resources. Despite the SEC’s reliance on information from companies in reviewing climate-related disclosures, the staff does have the tools and resources to help its staff in the review process. Mechanisms identified by the staff, which are not particular to climate disclosures, include internal supervisory control testing; a two-level review process; regulations and formal and informal SEC guidance; the use of internal and external databases; and staff training and experience.

Senior staff from Corporation Finance generally agreed with the GAO’s findings, the report notes.