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Senate Subcommittee Witnesses Urge SEC to Issue Guidance on Climate Change Disclosure

In testimony before the Senate Subcommittee on Securities, Jeffrey A. Smith, the partner in charge of the environmental law office at Cravath, Swaine & Moore LLP, said it is time for the SEC to reassert its gatekeeper role for the market and clarify its expectations with respect to disclosure about climate change. Witnesses representing Ceres and the California Public Employees' Retirement System also called on the SEC to issue interpretive guidance on climate change disclosure to increase the consistency in financial reporting. No statutory changes are needed, Ceres President Mindy Lubber advised. The SEC currently has the authority to require the disclosure of material risks associated with climate change, she explained.

Smith said that the best of the climate change disclosure has been done outside of the mandates of the 1933 and 1934 Acts. Although much of this reporting is thorough and well-intentioned, it is no substitute for mandatory reporting, according to Smith. The current disclosure provides no basis for comparison and no accessible measurement against a recognized benchmark, he explained.

If the SEC reasserts its preeminence in the information marketplace, Smith said a normative body of disclosure would develop and disclosure expectations will keep pace with the rapid changes the market requires. He warned against an over-reaction, however, which "could unleash a flood of defensive filings of immaterial and premature information." Climate change will demand the SEC's ongoing attention, in his view, since changing circumstances will require changing responses.

Lubber advised that, in the absence of mandatory federal disclosure guidance, a large number of investors are seeking enhanced disclosure by submitting shareholder resolutions. Investors have filed over 150 resolutions in the past several years seeking improved climate disclosure, she said. While the resolutions produce positive results, Lubber said they are not adequate for addressing a problem that affects many companies and sectors. Resolutions only allow shareholders to engage one company at a time, she noted, and they often have to be refiled several times before a company will agree to take the requested action.

In addition, Lubber noted that the resolutions are advisory in nature and cannot force companies to take action. The SEC often limits the inclusion of shareholder resolutions in a company's proxy, she added. She urged the SEC to address the inconsistency with which its staff applies the "ordinary business" exclusion in order to provide consistency in financial reporting.

These resolutions cannot take the place of uniform, consistent guidance on the disclosure of climate-related risks, according to Lubber. She testified that a group of investors has been working for four years to persuade the SEC to improve climate risk disclosure. Without SEC guidance, Lubber said climate reporting rates in SEC filings will remain low. The quality of the reporting is also generally low, she said.

Lubber emphasized that investors are not seeking an onerous new disclosure regime. The group of institutional investors that petitioned the SEC for interpretive guidance believes that the current law already requires the disclosure of material climate risk. Lubber said the SEC should issue guidance which makes clear that climate risk requires the same attention and disclosure as other forms of risk.

Russell Read, the chief investment officer for CalPERS, testified that CalPERS wants to invest in companies that are in a position to avoid the financial risks associated with climate change and can capitalize on new opportunities that may arise, such as alternative energy technologies. CalPERS cannot assess a company's vulnerabilities without disclosure about its potential exposure to climate-related risks and any potential benefits, according to Read.

Read echoed Smith's views that voluntary disclosure lacks consistency. He added that companies are far more likely to report their potential opportunities rather than their financial risks from climate change. CalPERS was among the institutions that submitted the petition to the SEC asking that it require companies to assess and fully disclose their financial risks from climate change.

Senator Thomas Carper (D-DE) noted that a global warming bill introduced by Senators Joseph Lieberman (I-CT) and John Warner (R-VA) includes a provision that would require the SEC to promulgate regulations to require companies to disclose their environmental risks. Lubber said that Ceres is delighted that the provision is included in the legislation. Smith said the provision is useful, but it is not necessary. Read agreed that the SEC already has the authority to require the disclosure, but said it may take the prodding of the legislation for it to issue a disclosure standard.