Climate Change Disclosure: A Failed SEC Mandate

Abstract

In 2010 the SEC issued an interpretive guidance calling on public companies to take seriously their disclosure responsibilities with respect to climate risk. The guidance identified the SEC line-item rules that required discussion and analysis of how climate change regulation, international treaties, shifting consumer and supplier demand, and severe weather events could affect the company’s bottom line. The guidance was met with great fanfare, with more than 50 corporate law firms sending special alerts to their clients describing the new disclosure initiative, socially-focused investor groups declaring victory in putting climate change on the corporate agenda, and the SEC announcing plans to intensify its focus on the issue. Then it all unraveled. Although corporate disclosure ticked up in the months after the guidance, it remained mostly boilerplate (with statements like “concerns about climate change could lead to additional regulations that could affect our business”). During the first years after the SEC guidance, fewer than three-fifths of companies in the S&P 500 mentioned climate change in their 10-K annual reports, most of these including only a short one-paragraph risk factor. Yet these same companies (more than 95%) provided extensive disclosure about the importance of climate change in their glossy CSR reports and many offered extensive CO2 emissions data in voluntary reports to various NGO clearinghouses. This article considers why climate change disclosure has been anathema to corporate management in SEC filings, while becoming a mainstay of public relations and even voluntary environmental compliance. Rather than being treated as a business factor similar to compliance risk, climate change seems to have been cabined into a public relations hole. Why is this? This article offers and considers seven hypotheses: (1) SEC disclosure mandates on moral/ethical matters, such as response to climate change, engender management resentment; (2) the impact on a particular company of climate change, given its unprecedented nature, is nearly impossible to predict; (3) SEC filings (compared to voluntary CSR disclosures) carry liability risks; (4) voluntary climate disclosures, typically limited to specific activities (like carbon emissions), are more rewarding to corporate management; (5) company assessment of climate risk and opportunity is highly proprietary, perhaps even a key to business survival in many sectors; (6) sustainability issues, including those related to climate change, are not woven into the governance and operational fabric of modern business, making them hard to quantify, analyze and report; and (7) the SEC recognized that mandating a corporate focus on climate change is beyond its regulatory competence or its statutory mandate to regulate financial disclosures. The failure of the SEC Guidance makes clear that for climate change disclosure to be meaningful it must be an element of integrated corporate engagement with the issue. Like financial disclosure, climate change disclosure must arise from a systemic approach that includes identification, recognition, measurement, assessment, and auditing. Given the ongoing gridlock in our national regulatory system, it is unlikely climate change will receive systemic governmental attention. Instead, the real engine for abatement and adaptation will come from the private sector – and specifically from consortia of institutional shareholders and corporate management. How to engage corporate management and move climate change from the glossy back burner to the hot front burner is a great question of our time – perhaps the greatest. The SEC Guidance and its denouement make clear that regulatory mandates for disclosure of climate risk may be a necessary part of new structures of corporate engagement with climate change, but mandates alone cannot be sufficient.