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Lawmakers Push for Stronger Scrutiny of Climate Change Disclosures

Thirty-five lawmakers urged the SEC to step up its effort to make sure that public companies disclose the risks they face from more damaging storms and rising temperatures and sea levels. They said they were worried about weather related disasters that have cost the U.S. more than $1 trillion since 1980.

Thirty-four Democrats and one independent member of Congress urged the SEC in an October 29, 2015, letter to step up its effort to have public companies comply with the disclosure requirements about the risks they face from climate change.

“The effects of climate change can pose material and evolving challenges for many companies and investors deserve access to complete and accurate information,” said the letter’s lead author, Senator Jack Reed, a senior member of the Senate Banking Committee from Rhode Island. “Our markets work best when investors have access to reliable information, and we should have every confidence that the SEC is robustly enforcing the disclosure regulations on the books.”

The letter to SEC Chair Mary Jo White was signed by 16 senators, including Banking Committee ranking member Sherrod Brown of Ohio, Elizabeth Warren of Massachusetts, and Barbara Boxer of California, and 19 congressmen, including Matt Cartwright of Pennsylvania and Chris Van Hollen of Maryland. Bernie Sanders, the presidential candidate and independent senator from Vermont, also signed the letter, bringing the total number of lawmakers to 35.

In particular, the lawmakers said they are worried that the SEC has been poorly enforcing its 2010 interpretive guidance on disclosures about environmental issues in Release No. 33-9106, Commission Guidance Regarding Disclosure Related to Climate Change. The release summarized existing disclosure requirements that officials believed encompassed climate risks. But it did not add new requirements.

According to the release, climate risks could be triggered by lawsuits, business risks, regulation, or international treaties.

The 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 said.

The lawmakers cited reports by the National Centers for Environmental Information (NCEI) at the National Oceanic and Atmospheric Administration that said 178 weather and climate disasters in the U.S. since 1980 have cost a total exceeding $1 trillion.

In 2014, NCEI reported that there were eight weather and climate disasters, including drought, floods, and storms, with losses exceeding $1 billion each.

“The financial effects of these disasters, whether resulting from droughts, floods, or severe weather, are precisely the types of risks the SEC cited as potential material disclosures in its Climate Change Guidance,” the lawmakers wrote. “With extreme weather and sea-level rise expected to worsen in the coming years, we believe that the SEC may need to redouble its efforts to ensure that all reporting companies are in conformance with the SEC’s Climate Change Guidance.”

The lawmakers asked the SEC to provide details about its current enforcement efforts by November 30. They said they want to know what the SEC does to make sure that public companies understand and comply with the guidance. They also want to know how often SEC staffers have asked companies to explain their climate disclosures while reviewing public company filings.

The October 29 letter was preceded by an August request from nine senators, including Warren, that the SEC make a priority of reviewing disclosures about environmental risks, given the revelation that Royal Dutch Shell plc was withholding information about the risks it faced drilling for oil in the Arctic Ocean.

“We safely drilled a well in our Burger prospect offshore Alaska this past summer,” wrote a Shell spokesperson in an emailed response to a request for comment. “Given the results of that well and the high cost and unpredictable regulatory environment, we have decided to cease further exploration activity offshore of Alaska for the foreseeable future. That said, we remain satisfied with our 20-F disclosure as it complies with all SEC legal requirements. It has been, and remains, our view that a very unlikely spill in the Arctic would not be financially material to the company, given the precautions taken in advance to prevent and respond to a worst case scenario.”

On October 29, Shell reported a $7.4 billion loss for the third quarter, after taking $8.2 billion in charges, including a $2.6 billion write-off for shutting down the Arctic drilling operations.

The senators’ August request to the SEC said Shell has invested billions of dollars on leases and preparing exploratory activities since 2005 and is seeking approvals to use two drilling vessels. The senators said these activities carry significant risks, pointing to the 2010 Deepwater Horizon disaster off the Louisiana coast.

“Despite these realities, Shell has provided investors with boilerplate generalities about the potential for an accident and insistent that the company has a sufficient plan for response and clean-up,” the August letter said. “Shell, however, has not disclosed that its techniques have not been fully tested in Arctic conditions or that they are highly unlikely to be as effective as the company has claimed. Shell also has obscured disclosure of serious equipment problems and has not provided investors with an estimate of the likely costs of a spill and funding a subsequent response. Furthermore, Shell’s annual reports reveal a pattern of failing to disclose litigation that concerns the aforementioned issues.”

In May, the Union of Concerned Scientists also wrote to the SEC, and said many companies all but ignore the 2010 climate guidance.

A study by the group modeled sea level rise and storm surge at five refineries on the Gulf and East Coasts and found that the top five U.S. refining companies have not fully disclosed the costs they have incurred and the risks they face from storms and rising sea levels.