Through statements made by Allison Herren Lee, the Acting Chair of the Securities and Exchange Commission (SEC), it is clear the SEC is taking risks to the financial markets posed by climate change very seriously. In February, the SEC announced that there will be enhanced focus on climate related disclosure in public company filings .
In her November 2020 keynote at PLI’s Annual Institute on Securities Regulation , Lee doubled down on the intersection between climate risk and regulation. Specifically, Lee stated: “Broadly, we must ensure that we work with fellow regulators to understand and, where appropriate, address systemic risks to our economy posed by climate change. To assess systemic risk, we need complete, accurate, and reliable information about those risks. That starts with public company disclosure and financial firm reporting and extends into our oversight of various fiduciaries and others. Investors also need this information so they can protect their investments and drive capital toward meeting their goals of a sustainable economy.”
So, what does this mean for reporting companies?
Is this Y2K all over again? Old securities lawyers remember that disclosure requirement with either mirth or distain. The Y2K issue also resulted in guidance from the SEC , and the disclosure was robust around the topic, with lots of hand wringing. But alas, Y2K came and went, to be replaced with conflict minerals. What might be helpful is disclosure requirements on supply chains and trafficked labor (I think requiring a light to be shone on supply chains that include trafficked labor might cause a change in behavior). But back to climate risk.
Guidance is coming soon from Corporate Finance on what will need to be disclosed. Hopefully that guidance will be clear as to the purpose of the enhanced focus and will provide real information investors can use to make informed decisions. In anticipation of guidance, I can see the boilerplate disclosure now — we considered climate risk and if something goes bad with the climate, our business might be harmed and we might lose money, blah, blah, blah. Are public companies going to be tagged for having less than fulsome disclosure if something – say a global pandemic that is found to be connected to climate change (a foreseeable climate risk?) – leads to bad earnings and results? Or are we in the same boat as Y2K.