AGs Weigh in on SEC Regulation of Climate Change Disclosures

This blog post was written by Foley Hoag Summer Associate, Adam Aguirre

When would-be investors research a company, they often look to the company’s balance sheet and cash flow. But what about the company’s contribution to greenhouse gas emissions? Such information may become readily available if the SEC follows the advice of a coalition of Democratic Attorneys General.

In March 2021, the Securities and Exchange Commission (SEC) began to re-evaluate its regulation of how companies must disclose information regarding climate change, and invited public comment regarding disclosure requirements.  California Attorney General Rob Bonta, along with eleven other Democratic attorneys general, wrote to the Chair of the SEC calling “for comparable, specific, and mandatory climate-related disclosures.” The letter follows a number of environmental enforcement activities on behalf of a number of AGs, such as Massachusetts AG Maura Healey’s suit against Exxon for deceptive advertising regarding its climate policy.  These actions have centered on holding companies accountable for statements to the public and to investors about the impact of climate change.  But as we have written in the past, such actions must confront a sometimes awkward fit between traditional consumer protection and environmental law and the unique challenges posed by climate change, leaving state AGs looking for additional tools.

The AGs’ letter points out that climate change has already exacted a $600 billion toll on American companies since 2016, in the form of increased operational costs and supply chain disruptions.  The AGs highlight the importance of citizen-investors having information regarding a company’s plans to confront the issue. Impacted citizen-investors include those with pensions, college savings accounts, and retirement funds — many, many people.

While the SEC requires public firms to disclose risks and bars the distribution of misleading disclosures, many companies make inadequate or no reference to the challenges they face because of climate change. The AGs assert that if investors must consider the impact of climate change on their investments, so too must the companies in which they are investing. The state AGs point to one of the purposes of the SEC to make available “to the investing public, sufficient information concerning the management and financial condition of corporations on which the investor can intelligently act in making investments.”

The Democratic AGs’ request faces a clear partisan divide. Republican lawmakers wrote a letter claiming that disclosure mandates exceed the SEC’s legal authority and that “it does not have a mission of remaking society or our economy as a whole.” Add to that the call by Republican state attorneys general for the SEC to resist disclosure mandates. The Republican AGs assert that the environmental disclosures are unnecessary to protect markets and investors. What is more, they argue that climate issues do not constitute a sufficient interest to compel corporate speech.

Hundreds of investors representing over $41 trillion in assets, including Fidelity and State Street, have implored governments to set aggressive emission reduction targets and require companies to disclose climate risks associated with their business. These investors have made it plain that those countries that most urgently address climate change “will become increasingly attractive investment destinations.”

The SEC has multiple potential avenues to act if it chooses to do so.  The SEC’s original solicitation invites public input both on existing requirements as well as “potential new Commission disclosure requirements” or “potential new disclosure frameworks that the Commission might adopt or incorporate in its disclosure rules.”  On July 28, 2021, SEC Chair Gary Gensler was reported to have asked agency staff to submit a proposal to require climate reporting in annual 10-K filings, though it is unclear whether the proposal would amount to new guidance on existing rules or entirely new requirements; either way, the SEC is likely to solicit additional comments on its chosen course, given the likelihood of potential legal challenge.

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