Summary: Comments are due July 21, 2016 on a concept release published on April 22, 2016 by the U.S. Securities and Exchange Commission (“SEC” or the “Commission”) on potential revisions to certain business and financial disclosure obligations in Regulation S-K, which governs the disclosure requirements applicable to periodic reports. Among other topics, the Commission requested comment on expanding disclosures relating to environmental sustainability and public policy issues, including climate change. The Commission is soliciting public input on a number of specific questions, including whether to impose line-item disclosure requirements related to sustainability and public policy issues, the overlap with reporting of information concerning sustainability outside of Commission filings, and potential challenges and costs of compliance. Companies should ensure that their interests are reflected in the comment process—either directly or through participation in industry organization commenting efforts.
Specific Requests for Comment
Among other areas, the Commission seeks input on eight specific prompts relating to sustainability disclosure requirements, including:
- Adequacy of existing disclosure requirements in eliciting information that would permit investors to evaluate material climate change risk;
- Specific sustainability or public policy issues important to investors, including the degree of flexibility in the disclosure framework and guidance from the Commission;
- Potential drawbacks to line-item sustainability disclosures;
- Interaction with sustainability information provided by companies outside of Commission filings;
- Role of existing or emergent voluntary sustainability reporting frameworks in developing sustainability disclosure requirements;
- Consistency of specific sustainability disclosures with the Commission’s mandate to protect investors;
- Costs and challenges of preparing sustainability disclosures; and
- Scaling or exemptions for smaller reporting companies or other types of registrants.
On April 22, 2016, the Securities and Exchange Commission published a concept release—a precursor to a potential proposed rule—seeking public comment on changes to modernize Regulation S-K, which sets forth the disclosure requirements in certain filings to the Commission. 81 Fed. Reg. 23,916 (Apr. 22, 2016). Regulation S-K was originally adopted to integrate the different disclosure requirements under the Securities Act of 1933, registration statements under the Securities Exchange Act of 1934, and other Securities Exchange Act filings, such as periodic and current reports, with the purpose of providing investors with the information necessary to make informed investment and voting decisions.
The concept release is part of a comprehensive review of the Commission’s disclosure requirements (referred to by the Commission as the “Disclosure Effectiveness Initiative”), which was mandated by the 2012 Jumpstart Our Business Startups Act (“JOBS Act”). The concept release focuses on the business and financial disclosures that registrants provide in their periodic reports, which are a subset of the disclosure requirements covered by Regulation S-K. The Commission is soliciting comment on several aspects of Regulation S-K; this alert discusses only those related to environmental disclosures.
This concept release comes at a time of increasing pressure for companies to disclose risks related to climate change. Several state Attorneys General recently formed a coalition of “AG’s United for Clean Power” aimed at addressing climate change in part by using broad state anti-fraud laws to investigate the adequacy of companies’ disclosures related to climate risk. At the May 25, 2016 annual meetings of Chevron and Exxon Mobil, shareholder proposals requesting an annual assessment of long-term portfolio impacts of possible public climate change policies were narrowly defeated. The shareholder proposals garnered the support of 41% of Chevron’s investors and 38% of Exxon’s investors. Board-supported shareholder resolutions along similar lines were passed by an overwhelming majority by Royal Dutch Shell, BP, and Statoil in 2015. Such high levels of support indicate that mainstream investors are seriously considering risks posed by climate change. The White House has also recently indicated that it will propose a rule requiring companies with federal contracts to disclose certain information related to climate change risks and mitigation measures.
The Commission’s Current Approach to Sustainability Related Disclosures
While Congress has in recent years mandated several new disclosure requirements that address specific public policy concerns—for example, registrants’ use of “conflict minerals”—the Commission interprets its authority when promulgating disclosure requirements as limited to 1) furthering a specific congressional mandate, or 2) promoting goals related to the objectives of the federal securities laws, namely whether information is “material” to the investor’s ability to make informed investment and voting decisions. Historically, companies, investors, and the Commission have not considered some environmental, social, or governance (“ESG”) information to be material. In the concept release, however, the Commission acknowledges that identifying what is “material” to investors’ decisions is an ongoing task, and it states that the “role of sustainability and public policy information in investors’ voting and investment decisions may be evolving as some investors are increasingly engaging on certain ESG matters.” 81 Fed. Reg. 23,971-72. To that end, the Commission is soliciting feedback on the importance of sustainability and public policy matters to informed investing and voting decisions.1
To date, the Commission has received several comments responding to the concept release’s ESG prompts. The thrust of the comments submitted thus far is generally for expanded disclosure of sustainability related risks. Comments were submitted by a range of entities and individuals, including investment managers (Terra Alpha Investments LLC and AJF Financial Services, Inc.), a former SEC Commissioner (Bevis Longstreth), a law firm securities practice (Wachtell, Lipton, Rosen & Katz), and an investment research institute (the Investor Responsibility Research Center Institute).
The majority of these commenters viewed ESG information as “material” and argued that the Commission should require companies to disclose environmental data and risks. Commenters also discussed standardizing ESG disclosures or adopting the sustainability standards developed by the Sustainability Accounting Standards Board. One commenter advocated for protections for sustainability related disclosures, such as through safe harbor provisions, or by allowing companies to communicate this information through other media instead of filings with the Commission. Overall, the commenters largely supported mandatory sustainability disclosures and requirements to elicit more transparent information concerning environmental risk. Ceres, an investor advocacy group, is also expected to file comments supporting increased climate risk and sustainability reporting.
Prior to the publication of this concept release, the Commission also received public comments in connection with the launch of the Disclosure Effectiveness Initiative on various topics covered by the concept release. Previous comments addressing ESG matters are summarized below. In addition to comments directly responding to the concept release, these older comments will also be considered as part of the Commission staff’s evaluation of whether changes are needed to the current Regulation S-K.
Previously filed comments addressed various sustainability related disclosure requirements, including climate change, resource scarcity, corporate social responsibility, and good corporate citizenship. The Commission reported that many commenters advocated for mandatory sustainability disclosure requirements. The Commission noted that a number of commenters also argued that disclosures under the Commission’s current rules do not adequately address the risks associated with climate change, including specific risks such as stranded assets and regulatory risk. Additional comments recommended the adoption of new line-item disclosure requirements for climate change matters, requiring disclosure of carbon costs and risks. Among the commenters seeking increased sustainability disclosure requirements were Union of Concerned Scientists; Ceres; Global Reporting Initiative; Carbon Tracker Initiative; Investor Environmental Health Network; Wallace Global Fund; Harrington Investments; Interfaith Center on Corporate Responsibility; Sustainability Group; US SIF and US SIF Foundation; First Affirmative Financial Network Group; and Allianz.
On the other side, the Commission reported that it previously received comments as part of the Disclosure Effectiveness Initiative opposing requiring mandatory sustainability related disclosures as not material to investors’ understanding of a company’s financial performance. Commenters also argued that environmental disclosures represent a deviation from the Commission’s mandate to protect investors, and that adding new sustainability disclosures would impose costs on companies and investors without adding material information necessary for investment decisions. The Society of Corporate Secretaries and Governance Professionals and Business Roundtable were among the commenters expressing this view.
More comments responding to the sustainability related disclosure prompts are expected during this open comment period. Comments are due July 21, 2016.