Climate Change and the SEC: How Much Disclosure is Enough?

By: Alix Dobles

SECAs climate change risks arising from the energy sector have become a growing concern, and changing attitudes about climate change have led to more stringent regulations, state authorities and institutional investors have looked to the Securities and Exchange Commission to demand the disclosure of climate risk in companies’ securities filings.  The SEC has begun to ask companies to adequately address climate change risk in their disclosures, but many believe that the SEC has not done enough to inform investors and protect them from such risk.  As The New York Times put it, “[a]t a time of upside-down weather patterns, volatile energy markets and mounting climate-related regulatory action, [this] is simply not enough for many lawmakers and investors, who worry that companies’ reticence is costing shareholders.”[i]

As of 2010, the SEC has told companies that it expects the company to disclose risks posed by climate change in their regular securities filings.  However, the SEC has not issued a new rule, and instead has treated the requirement as “interpretive guidance” of existing disclosure requirements.[ii]  In its press release, the Commission stressed that the interpretation “did not create new legal requirements nor modify existing ones, but are intended to provide clarity and enhance consistency for public companies and their investors.”[iii]

Initially the SEC appeared to be serious about the interpretive guidance, and issued 49 comment letters to companies regarding the adequacy of their climate change disclosures in the first two years following the press release.[iv]  However, the SEC has been seriously under-reacting ever since, issuing only 3 letters in 2012 and even fewer in following years.[v]   It appears as though the SEC has let vague generalizations of climate risk disclosure suffice.  For example, Exxon noted in its filing that new laws may “reduce demand for hydrocarbons,” but did not address what the financial cost of these new laws may be for investors.[vi]

While this may be sufficient for the SEC, it is not sufficient for the New York Attorney General. In a settlement agreement signed in November 2015, Peabody Energy agreed that it would disclose in greater detail the financial risks it could face from climate change policies in its securities filings.[vii]  The agreement arose after a two-year investigation by the Attorney General found that Peabody had purposely withheld information in its SEC filings that the company’s value would continue to fall, due to more stringent regulations and a decrease in the demand for coal.[viii]  The Attorney General has also initiated an investigation of Exxon Mobil to determine whether it lied to investors about the risks of climate change and how such risks might hurt the oil business.[ix]

Possibly the biggest reason why oil, gas, and coal companies in particular are not disclosing sufficient climate risk information is because they are keenly aware of how this may affect their ability to obtain investments.  The general public is more conscious than ever of the threats associated with climate change, and large greenhouse gas emitters, such as oil, gas, and coal companies, are the first to be blamed.  Companies are worried that investors will not choose to invest in businesses that are so greatly affected by such a hot topic.  Customers and investors are already turning away from fossil fuels, even without companies sufficiently addressing them in their securities filings.

Another reason why these companies are not adequately disclosing climate risk is that the lack of a promulgated rule has made this new territory of disclosure fairly ambiguous.  The SEC’s interpretive guidance stresses the following four areas where climate change may trigger disclosure requirements: impact of legislation and regulation; impact of international accords; indirect consequences of regulation or business trends; and physical impacts of climate change.[x]  For example, a company may have an obligation to disclose if a pending regulation limiting greenhouse gas emissions could potentially increase its expenses, or if a trend of sustainable business practices in competing products could cause a decreased demand for goods.  However, the guidance lacks definitive wording, and much of what “may” need to be disclosed appears largely speculative.  A company will not disclose more than it needs to, and without definitive requirements, a company is not going to analyze and disclose a climate risk unless the SEC specifically asks for it.  Thus the SEC’s interpretive guidance falls short of the clarity and consistency that it purports is its very purpose.

To date, the SEC has not promulgated a rule regarding what climate-related risks a company is required to disclose, nor has the SEC hinted that it has any plans to do so.  However, the SEC has been reviewing what it may require to disclose, and has been accepting public comments on the matter.  Political pressure will only increase as stocks continue to respond to new limits and regulations on the energy sector, and the SEC may have no choice but to create a legal requirement of climate risk disclosure through the passing of a new rule, especially after its disregard for adequate climate risk disclosure was uncovered in the Peabody settlement.  The question is: How long will the SEC allow half-hearted climate risk disclosure to suffice?

[i] David Gelles, S.E.C. is Criticized for Lax Enforcement of Climate Risk Disclosure,N.Y. Times, Jan. 24, 2016, at BU7.

[ii] Press Release, SEC, SEC Issues Interpretive Guidance on Disclosure Related to Business or Legal Developments Regarding Climate Change (Jan. 27, 2010),

[iii] Id.

[iv] Gelles, supra note 1.

[v] Id.

[vi] Id.

[vii] Clifford Krauss, Peabody Energy Agrees to Greater Disclosure of Financial Risks, N.Y. Times, Nov. 9, 2015, at B1.

[viii] Id.

[ix] Justin Gillis & Clifford Krauss, Exxon Mobil Investigated for Possible Climate Change Lies by New York Attorney General, N.Y. Times, Nov. 6, 2015, at A1.

[x] Press Release, SEC, supra note 2.

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