The SEC has received the latest request to act on ESG-related disclosures, although agency officials have indicated caution over prescriptive rulemaking in the area.
McLean, Virginia-based Energy and Environment Legal Institute (E&E Legal) this week filed a petition urging the commission to ‘take appropriate action to prevent and prohibit registrants from making materially false and misleading claims and statements related to global climate change.’
E&E Legal states that it does not wish to change the SEC’s 2010 risk-oriented disclosure guidance on climate change. In addition to any such disclosures required by other SEC rules, the guidance suggested four climate-related areas subject to disclosure – i.e. business risks – from: legal or regulatory impacts; international agreements; business trends; and weather/physical events.
Rather, E&E Legal wants the SEC to prevent and bar registrants from making false and misleading climate-related claims about their own actions.
‘The commission’s 2010 guidance was intended to guide registrants on climate-related disclosures as they related to various potential risks to their businesses,’ E&E Legal director Steve Milloy writes. ‘But registrants have taken the climate issue way beyond risks to business; they now use claims about climate to tout their actions to investors.’
The group cites examples of statements concerning climate in company reports that it says are false and/or misleading because they lack necessary context. ‘Statements boasting about cutting even millions of tons of CO2 emissions in a world where 53.5 billion tons are being emitted every year is false and/or misleading,’ Milloy writes.
He adds that company statements about capturing and storing carbon or shutting down coal plants are ‘commonly exaggerated way out of all proportion.’ These types of statements mislead investors by giving them the false impression that the emissions cuts are significant or meaningful, he says.
‘Regardless of one’s views on climate science, simple math shows that no registrant can affect climate in any discernible manner,’ Milloy states. ‘No single registrant is saving the planet. All US registrants taken together can’t save the planet by even by eliminating all their emissions. The math is simple.
‘Claims to the contrary are false and/or misleading. It is a fundamental principle of the securities laws that if a registrant chooses to speak, it must do so truthfully. The duty to be honest is basic. Partial disclosure that is materially misleading, especially if an investor acts on it, is fraud.’
The E&E Legal petition is not the only call for the SEC to beef up its stance on ESG disclosure. A coalition of academics, institutional investors and government officials last October petitioned the agency to spell out what and when companies are required to tell investors about ESG issues. They urged the commission to ‘initiate rulemaking to develop mandatory rules for public companies to disclose high-quality, comparable, decision-useful [ESG] information.’
The signatories included CalPERS and New York State comptroller Thomas DiNapoli. More public companies, in the face of investor pressure, are voluntarily producing sustainability reports designed to explain how they are creating long-term value, but there are difficulties with the nature, timing and extent of these disclosures due to a lack of adequate standards, the petitioners argued.
In addition, the Human Capital Management Coalition, a group of institutional investors with a combined $2.8 trillion in assets, in 2017 petitioned the SEC to require companies to disclose more information about their human capital practices.
There appears to be limited appetite among at least some senior SEC officials about taking determinative action on ESG disclosures. William Hinman, director of the agency’s division of corporation finance, earlier this year expressed caution about mandating specific disclosures in the ESG field, expressing a preference for market forces to determine what companies report.
‘While many market participants have expressed a desire for more specific sustainability disclosure requirements, others have concerns that specific sustainability disclosure requirements could result in disclosure that might not be considered material to a reasonable investor,’ he said. ‘In addition, market participants who do support additional sustainability disclosure requirements do not themselves uniformly recommend additional disclosure on the same sustainability issues.
‘The marketplace evolution of sustainability disclosures is ongoing – companies certainly provide more sustainability information than they did 10 years ago – and allowing this evolution to continue should provide market participants with a continued opportunity to sort out the types of information they find useful.’
In the meantime, the agency is keeping tabs on market-led approaches developing in this area and is comparing the information companies voluntarily provide – typically outside of their SEC filings – with the disclosure they log with the SEC, according to Hinman.
In remarks made earlier this year about human capital disclosure requirements, SEC chair Jay Clayton said: ‘I am wary of jumping in with rules or guidance that would mandate rigid standards or metrics for all public companies. Instead, I think investors would be better served by understanding the lens through which each company looks at [its] human capital.’
The commission last week proposed rule amendments that would update the description of business, legal proceedings and risk factor disclosures that registrants must make under Regulation SK. One of the proposed changes would include human capital resources as a disclosure topic, including ‘any human capital measures or objectives that management focuses on in managing the business, to the extent such disclosures would be material to an understanding of the registrant’s business.’
In the spirit of Clayton’s remarks, the proposed changes take a more principles-based – rather than line-item - approach than has been the case with SEC rules until now. In doing so, companies would have more flexibility in how they craft disclosures.
Ben Maiden
Ben Maiden is the editor-at-large of Governance Intelligence, an IR Media publication, having joined the company in December 2016. He is based in New York. Ben was previously managing editor of Compliance Reporter, covering regulatory and compliance...
