The Government Accountability Office, the research arm of Congress, has released a new report analyzing the Securities and Exchange Commission’s requirement of disclosures regarding material climate-related risks.
In 2010, SEC issued guidance to clarify how existing disclosure requirements apply for climate-related matters. The Commission also issues individualized guidance in comment letters to specific companies regarding their climate-related disclosures.
The GAO was asked to review: steps the SEC has taken to clarify to companies their disclosure requirements for climate-related risks; steps the SEC has taken to examine changes companies may have made to their climate-related disclosures since the release of its 2010 Guidance; and constraints the SEC faces when reviewing climate-related disclosures and stakeholders' views of those disclosures.
“We reviewed steps SEC has taken to clarify companies' climate-related disclosure requirements. Industry representatives told us that they consider the requirements to be clear and adequate,” the report says. “At the same time, some investor groups expressed a need for more information.
The SEC issued two reports to Congress in 2012 and 2014 that examined changes in climate-related disclosures in select industries. SEC found that most of these filings included some level of climate-related disclosures and reported that there were no notable year-to-year changes. The SEC continues to periodically assess climate-related disclosures in addition to its regular disclosure review process.
In April 2016, the SEC requested public input on modernizing certain business and financial disclosure requirements, including potential changes on reporting climate-related risks in filings. Despite that review, the SEC has no current plans to modify its climate-related disclosure requirements.
Among the findings in the GAO report are that representatives from industry associations, with whom GAO spoke, said they consider the disclosure requirements for climate-related risks to be clear and that they have no need for additional guidance. Some investor groups and asset management firms, however, highlighted the need for companies to disclose more climate-related information.
Yet another view comes from members of a subcommittee of SEC’s Investor Advisory Committee. They identified climate-related disclosures as a priority issue, but the subcommittee as a whole did not reach agreement that climate-related disclosures should be among its highest priorities.
As for the SEC and its Division of Corporation Finance staff, it faces constraints in reviewing climate-related and other disclosures because it primarily relies on information that companies provide.
Senior staff explained, during GAO interviews, that CorpFin staff assess companies' filings for compliance with federal securities laws—which require companies to disclose material risks—but do not have the authority to subpoena additional information from companies.
Greater clarity, however, could come at a cost. “Additional disclosure requirements or increased scrutiny of companies' climate-related information—which, if necessary, SEC and Congress can consider—could have mission and resource implications for the SEC's Division of Corporation Finance,” the report concluded.
An identified challenge for SEC reviewers is that they may not have access to the detailed information that companies use to arrive at their determination of whether risks, including climate-related risks, must be disclosed in their Commission filings.
SEC senior staff further noted that Corporation Finance staff assess companies’ filings for compliance with the disclosure requirements under federal securities laws but do not have the authority to subpoena companies’ information. The report adds that the SEC’s scope of review of companies’ disclosures under federal securities laws differs from the scope of review that may be possible through the investigative authority of the state attorneys general under state laws.
If SEC reviewers are aware of publicly-available information outside of the filings that is contradictory to companies’ disclosures, they can request additional information or clarification from companies on their climate-related and other disclosures through comment letters. However, a company possesses information necessary to determine whether environmental regulations will have a material effect on the company’s financial condition or results of operations and may claim that the effect of environmental regulations raised by SEC is not material and does not warrant further disclosure.
SEC staff told the GAO they determine whether further comments are needed based on whether a company’s response is consistent with other information the companies reported in other publicly available documents, such as financial analyst reports or the company’s sustainability report.
Additionally, companies may report similar climate-related disclosures in different sections of the filings, and climate-related disclosures in some filings contain disclosures using generic language, not tailored to the company, and do not include quantitative metrics.
“When companies report climate-related disclosures in varying formats and specificity, SEC reviewers and investors may find it difficult to compare and analyze related disclosures across companies' filings,” the GAO wrote.
The report also found that climate-related disclosures vary in format because companies may report similar climate-related disclosures in different sections of the annual filings.
When companies do so, SEC reviewers and investors “may find it difficult to navigate through the filings to identify, compare, and analyze the climate-related disclosures across filings, especially given the size of each individual filing. In addition, companies’ filings may include only a few mentions of climate-related disclosures,” the report says.
“Given that SEC reviewers primarily rely on information companies disclose in filings, it may be difficult to determine whether a low level of disclosure indicates that the company does not face any climate-related risks or does not consider the risks to be material,” it adds. “Also, climate-related disclosures in some companies’ filings use boilerplate language, which is not specific to the company, and the information is un-quantified.”
As for the potential need for training SEC staff in climate-related matters, it may not be necessary, the report concluded.
Most of the staff interviewed by the GAO indicated that they had some prior accounting or legal experience related to annual filing preparation or review, but they did not have any direct prior experience on climate-related disclosures. However, most said they generally do not need technical expertise to understand climate-related disclosures.
Some staff said they can, and do, consult mining or petroleum engineers within Corporation Finance if the disclosures relate to other subjects, such as oil and gas reserves.