Disclosure law in the United States is on the cusp of change. Significant shifts in the information investors expect to see in disclosures and how they use it are redefining what “material” is and changing disclosure obligations for companies. Federal financial regulators are also incorporating climate change risks into their work, adding pressure to improve climate-related disclosures.
The ability of climate change to disrupt lives, industries, and expected weather patterns has been painfully apparent this summer. The public’s growing understanding of the connection between climate change and the frequency and intensity of floods, fires, and storms mirrors the increasing alarm in the financial community about how climate change threatens investments and the financial system when risks to companies, supply chains, and communities are not managed well.
Since 2015, when the Financial Stability Board created its Task Force on Climate-Related Disclosure and former board chairman Mark Carney spoke of climate change as the “tragedy of the horizon,” a tremendous amount of work has helped us better understand the risks and opportunities that climate change poses to individual companies. Voluntary efforts have made progress in defining the most useful climate-related information and addressing challenges inherent in analyzing and disclosing such data. Until recently, these efforts have dominated the climate-related disclosure landscape.
However, a multitude of reporting frameworks and players with differing motivations for seeking climate-related information still makes it difficult for companies to navigate the demands of the financial community. We may have reached the limits of what voluntary disclosure approaches can achieve. It may now be necessary for regulators to serve as referees and provide guidance to achieve quality, consistent, and comparable climate-related disclosures that inform the market.
Regulators worldwide have already started incorporating climate change into disclosure requirements and financial system risk reviews. Until this year, the United States largely sat on the sidelines of these endeavors. No longer. This year, new leadership is setting the agenda for many financial regulatory bodies, and the Biden Administration has encouraged both the government and private sector to focus on climate-related risk management. We have seen the Securities and Exchange Commission (SEC), Commodity Futures Trading Commission, Department of Treasury, Department of Labor’s Employee Benefits Security Administration, the Office of the Comptroller of the Currency, and the Federal Reserve all take actions to better consider climate change in their work and, in the case of the SEC, make climate-related disclosures a priority for enforcement and regulatory initiatives.
The SEC has been the most active so far, reflecting the importance of company-level disclosure as an underlying input for broader financial risk assessments. The SEC recently asked the public to comment on approaches to disclosure requirements for climate change-related information and other environmental, social, and governance (ESG) topics. The commission intends to propose new disclosure requirements in October for climate-related risks and for human capital management. The SEC’s Division of Corporation Finance is also reviewing the Commission’s 2010 guidance on climate change disclosures and current compliance. Meanwhile, the Division of Examinations included climate change in its 2021 examinations priorities and issued a risk alert on ESG products and services, highlighting the importance of transparency to avoid misleading investors about what makes such products marketable as “ESG.” In addition, the Commission’s Division of Enforcement created a Climate and ESG Enforcement Task Force—and these are just some of the SEC’s actions to date. The Commission’s active agenda shows a new commitment to addressing climate risk, making up for lost time.
Public companies have faced increasing pressures from shareholders, banks, insurers, and other stakeholders to better disclose and address climate change risks—pressures that have already begun to impact the law around corporate disclosures. Now, they will need to engage with regulators on these topics as well. What the SEC learns from its comprehensive focus on climate change will feed into the approach it takes on new requirements. The SEC has not previously taken a close look under the hood of corporate disclosures to assess how companies are analyzing and disclosing their climate-related risks. This engagement is new for regulators and companies alike and will likely change how both do their work.
Asset managers, banks, and insurers are also facing new regulatory pressure to better understand, disclose, and adjust their business practices to prepare for climate-related risks. This adds to existing pressures on public companies and introduces pressures for private companies as well. If lenders and insurers are seriously considering climate risk in their portfolios, businesses (whether public or private) will need to demonstrate their preparedness and resilience to transition risks and physical risks to get the financing and coverage they need.
President Biden has directed the portions of the federal government over which he has authority to integrate climate change financial risk assessment into their work and to encourage information-sharing and problem solving among the various federal financial players. We have seen new climate-focused positions and offices created throughout the executive branch to help coordinate the efforts to implement the president’s policy goals. The Administration is incorporating climate change considerations into its procurement processes and researching how to integrate these risks into federal lending programs. These changes will not only impact the work of the government, but also those who do business with it.
All of these changes are still in early stages with rulemakings, guidance, and other actions to come—and likely litigation to follow. Yet, they clearly indicate a significant shift in federal financial regulation toward a more climate-conscious approach, one not so easily undone given the substantial amount of work that has taken place outside the regulatory sphere already. There’s no doubt that corporate and financial consideration and disclosure of climate-related risks, the changing understanding of how material that information is for the market, and deliberate efforts to evaluate such issues by federal regulators will have lasting legal impacts.
Hana V. Vizcarra, Staff Attorney at the Harvard Law School Environmental and Energy Law Program, authored the discussion on climate-related financial disclosure and risk management in ELI’s Law of Environmental Protection. The newly revised chapter on Climate Change covers the rapidly developing body of law around mitigation, adaptation, geoengineering, climate risk and financial disclosure, and much more. Read more in the latest edition of ELI’s Law of Environmental Protection.