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Investor Comment Letters Push for Better Disclosures About Climate Risks

The SEC is doing a comprehensive review of its disclosure rules to see whether some can be scaled back while other requirements are added. Investors with a stake in social and environmental issues and are asking the SEC to strengthen some requirements and push companies to provide more information about the risk from climate change.

Investors are increasingly taking advantage of the SEC’s top-to-bottom review of disclosure rules to push for stronger disclosure requirements about environmental and social practices of public companies.

The Sustainability Group of Loring, Wolcott & Coolidge, which manages client assets totaling about $1.36 billion, said companies are using too narrow an interpretation of the SEC’s requirements for “material” information and avoiding disclosing information related to environmental liabilities.

A 1998 study by the Environmental Protection Agency found that 74 percent of public companies failed to adequately disclose the existence of environmental legal proceedings in their 10-K registration requirements, the Sustainability Group said. Sixteen years later, companies continue to rely on a narrow definition of materiality and underreport information about environmental liabilities.

“Shareholders are left unaware of potential liabilities,” the Sustainability Group said in a comment letter to the SEC on August 12, 2014. “In our opinion, the existing regulations do not adequately protect investors.”

The group asked the SEC to assess its standards on materiality “and, perhaps, clarify that for Regulation S-K reporting, the commission does not consider current accounting standards to be adequate to deliver the desired result.”

First Affirmative Financial Network, an investment management firm, said in a June 26 letter that its clients ask it to consider environmental, social, and governance issues when evaluating companies for investment.

“Disclosures on how companies are identifying, managing, and mitigating climate impacts are not commensurate with the significant long-term risks posed by climate change,” wrote Holly Testa, the firm’s director of shareowner advocacy.

The SEC in 2010 issued interpretive guidance on climate change disclosures in Release No. 33-9106, Commission Guidance Regarding Disclosure Related to Climate Change. The document addresses disclosure requirements related to climate change that may be triggered by lawsuits, business risks, lawsuits, regulation, or international treaties.

The significant effects of climate change, such as severe weather, rising sea levels, loss of farmland, and the declining availability and quality of water, have the potential to affect a public company’s operations and financial results and should be disclosed, the release says.

However, Testa said several reports, including one by nonprofit Ceres in February, found that climate change disclosures have not improved much in the four years since the interpretive guidance was released.

Ceres said most companies in the Standard & Poor’s Index 500 write climate risk disclosures that are very brief, provide little discussion of material issues, and don’t quantify the effects or risks. Ceres also found that 41 percent of the companies in the S&P 500 said nothing about climate risks in their 2013 filings.

Investor efforts to get more effective information about climate-related risks come at a time when companies have been asking the SEC to cut back disclosure requirements, citing that the rules have grown too long and impose too many costs without adding much value for investors.

Keith Higgins, the director of the SEC’s Division of Corporation Finance, said on July 29 during a U.S. Chamber of Commerce event that the agency’s staff is considering making smaller, easier changes to its disclosure rules first before tackling more complicated items.

IBM Corp. had two recommendations that may fit Higgins’s description of small, simple changes. In an August 7 comment letter, the technology supplier asked the SEC to eliminate the prior year performance review requirement in the management discussion and analysis section of regulatory filings and eliminate the two-year quarterly information table, including the stock price information.

The SEC could update the interpretive guidance in its industry guides, and the Sustainability Accounting Standards Board could take that as an opportunity to propose its industry-specific standards as replacements, wrote Betty Moy Huber, co-head of the environmental group of Davis Polk & Wardwell LLP, in the Harvard Law School blog on corporate governance and financial regulation.

“To ultimately succeed, however, these groups may need to demonstrate that their concerns are shared by mainstream investors,” Huber wrote. “It is undeniable that companies are now taking the concerns of these investors seriously. It is now commonplace for companies and/or their boards to engage with shareholders and proxy advisory firms on environmental and sustainability issues, particularly in connection with shareholder resolutions.”

For example, Huber said investors filed in 2014 a record number of climate change proposals during proxy voting season.

However, Huber wrote that sustainability groups have a tough time ahead.

The SEC and in particular “Higgins have strenuously criticized what they call ‘information overload’ in SEC filings and the obfuscatory effect of too much disclosure,” she wrote. “In a March 2014 address…in Europe, Director Higgins criticized the ‘follow the leader’ approach to reporting whereby if one company includes new disclosure in its filings, other companies tend to copy and include similar disclosure in their filings, without giving adequate thought as to whether such disclosure is even relevant to their particular facts and circumstances.”

Huber also interpreted SEC Chair Mary Jo White’s speech in October 2013 as critical.

White “described how the SEC in the 1970s, as it adopted the environmental disclosure requirements in Regulation S-K, received investor requests for disclosure rules for more than 100 different ‘social matters’ covering a ‘bewildering array of special causes.'”

The SEC ultimately decided against making the disclosure rules because the benefits weren’t sufficiently large enough relative to the rule’s costs.

“In short, SEC Chair White — specifically choosing environmental disclosure as her example — cautioned against the perceived need to appease those who seek to effectuate social change through the SEC’s powers of mandatory disclosure,” Huber wrote. “If the SEC views the calls for sustainability disclosure to be politically motivated, unnecessary, or obfuscatory in any particular context, then the SEC may not have much patience for investors advocating for the same.”

The agency is trying follow through on a plan Congress initiated in the JOBS Act to clean up its disclosure requirements. The JOBS Act instructed the SEC to publish a report reviewing its disclosure rules in Regulation S-K. The December 2013 Report on Review of Disclosure Requirements in Regulation S-K, contained some preliminary conclusions but few specific recommendations for revising the rules.