Climate change activists are upping the pressure on public companies to disclose the risks they face due to a potential environmental catastrophe.
On Oct. 1, the Securities and Exchange Commission received a petition for a rulemaking that seeks a corporate mandate for environmental, social, and governance (ESG) disclosure.
The petition, which the Commission is under no legal obligation to act upon, is authored by Cynthia Williams, a business law professor at Osgoode Hall Law School, and Saul Fox, Professor of Business Law at the University of Pennsylvania Law School.
It was signed by dozens of investors and associated organizations representing more than $5 trillion in assets under management. Among them: the California Public Employees' Retirement System (CalPERS); New York State Comptroller Thomas DiNapoli; Illinois State Treasurer Michael Frerichs; Connecticut State Treasurer Denise Nappier; Oregon State Treasurer Tobias Read, and the U.N. Principles for Responsible Investment.
The rulemaking petition calls for the Commission to initiate notice and comment rulemaking to develop a comprehensive framework requiring issuers to disclose identified ESG aspects of each public-reporting company’s operations.
“Today, investors, including retail investors, are demanding and using a wide range of information designed to understand the long-term performance and risk management strategies of public-reporting companies,” the petitioners wrote. “Without adequate standards, more and more public companies are voluntarily producing ‘sustainability reports’ designed to explain how they are creating long-term value. There are substantial problems with the nature, timing, and extent of these voluntary disclosures, however. We respectfully ask the Commission to engage in notice and comment rule-making to develop a comprehensive framework for clearer, more consistent, more complete, and more easily comparable information relevant to companies’ long-term risks and performance.”
Such a framework, they say, would better inform investors and “provide clarity to America’s public companies on providing relevant, auditable, and decision-useful information to investors.”
The petition lays out six primary arguments supporting their rulemaking request:
The SEC has clear statutory authority to require disclosure of ESG information, and doing so will promote market efficiency, protect the competitive position of American public companies and the U.S. capital markets, and enhance capital formation;
ESG information is material to a broad range of investors today;
Companies struggle to provide investors with ESG information that is relevant, reliable, and decision-useful;
Voluntary ESG disclosure is episodic, incomplete, incomparable, and inconsistent, and ESG disclosure in required SEC filings is similarly inadequate;
Commission rulemaking will reduce the current burden on public companies and provide a level playing field for companies engaging in voluntary ESG disclosure; and
Petitions and stakeholder engagement seeking different kinds of ESG information suggest, in aggregate, that it is time for the SEC to regulate in this area.
On a similar track, legislatively, Senator Elizabeth Warren (D-Mass.) is sponsoring the Climate Risk Disclosure Act to require public companies to disclose critical information about their exposure to climate-related risks.
The legislation “will help investors appropriately assess climate-related risks, accelerate the transition from fossil fuels to cleaner and more efficient energy sources, and reduce the risks of both environmental and financial catastrophe,” she says.
The Climate Risk Disclosure Act directs the SEC, in consultation with climate experts at other federal agencies, to issue rules within one year that require every public company to disclose:
Direct and indirect greenhouse gas emissions;
The total amount of fossil-fuel related assets that it owns or manages;
How its valuation would be affected if climate change continues at its current pace or if policymakers successfully restrict greenhouse gas emissions to meet the Paris accord goal; and
Risk management strategies related to the physical risks and transition risks posed by climate change.
The Climate Risk Disclosure Act also directs the SEC to tailor these disclosure requirements to different industries and to impose additional disclosure requirements on companies engaged in the commercial development of fossil fuels.
In yet another indication that the push for corporate ESG disclosures is gaining momentum, proxy advisory firm Glass Lewis last month announced that guidance on material ESG topics from the Sustainability Accounting Standards Board (SASB) will be integrated into its standard proxy research as well as its vote management platform.
SASB develops and maintains sustainability accounting standards—for 79 industries in 11 sectors—to help companies disclose financially material information to investors in a cost-effective and decision-useful format. “SASB’s transparent, inclusive, and rigorous standards-setting process is materiality focused, evidence-based and market-informed,” Glass Lewis said in a statement.
“Many of our clients have adopted SASB standards as a mechanism to better understand the most pressing environmental and social factors for the companies in their portfolio,” said Courteney Keatinge, Glass Lewis’ Director of ESG Research. “Incorporating that information directly within our analysis and software will provide useful context in a timely manner.”
SASB’s information will be incorporated into Glass Lewis’ products in advance of the 2019 season.
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