In 2010 the U.S. Securities and Exchange Commission issued interpretive guidance titled Commission Guidance Regarding Disclosure Related to Climate Change on how to apply existing SEC disclosure requirements concerning the risks of climate change to public companies, material climate-related trends, legal proceedings, legislation and other climate associated matters that could affect those companies. Specifically, the SEC's interpretative guidance highlighted the following areas as examples of when climate change may trigger SEC disclosure requirements:
- Impact of Legislation and Regulation: When assessing potential disclosure obligations, a company should consider whether the impact of certain existing laws and regulations regarding climate change is material. In certain circumstances, a company should also evaluate the potential impact of pending legislation and regulation related to this topic.
- Impact of International Accords: A company should consider, and disclose when material, the risks or effects on its business of international accords and treaties relating to climate change.
- Indirect Consequences of Regulation or Business Trends: Legal, technological, political and scientific developments regarding climate change may create new opportunities or risks for companies. For instance, a company may face decreased demand for goods that produce significant greenhouse gas emissions or increased demand for goods that result in lower emissions than competing products. As such, a company should consider, for disclosure purposes, the actual or potential indirect consequences it may face due to climate change related regulatory or business trends.
- Physical Impacts of Climate Change: Companies should also evaluate for disclosure purposes the actual and potential material impacts of environmental matters on their business.
Although the SEC advised it would “monitor” the impact of its interpretive guidance on company filings, the SEC has yet to engage in any significant enforcement actions regarding climate change disclosures in light of its 2010 guidance. However, the New York Attorney General Eric T. Schneiderman has taken up the charge. On November 8, 2015, Peabody Energy Corporation, the world’s largest private-sector coal company, entered into a settlement agreement with the Attorney General with respect to Peabody’s statements regarding climate change in its SEC filings and other public statements. This settlement may well mark the first chapter in greater scrutiny of the substance of the climate change disclosures by companies.
Using the Martin Act (a New York state securities law that grants the Attorney General broad authority to investigate financial fraud and misleading disclosures) the Attorney General, in 2013, commenced an investigation into Peabody’s climate change disclosures. The November 8th settlement found that Peabody made two misleading public statements. First, Peabody’s statement in its annual reports filed with the SEC that it could not “reasonably predict the future impact of any climate change regulation on its business” was found to be misleading to investors. Peabody, in conjunction with its consultants, had prepared market projections of the potential impact of certain proposed climate change regulations and failed to disclose such projections. The market projections forecasted that “certain potential regulatory scenarios could materially and adversely impact Peabody’s future business and financial condition.”
Second, in several of Peabody’s SEC filings, Peabody’s disclosure regarding the International Energy Agency’s (“IEA”) projections of future coal demand failed to note the IEA’s less-favorable projections. Peabody’s discussion of the IEA’s projections misled investors by cherry picking the high case for coal usage, which “assumes that governments do not implement any recent commitments that have yet to be backed-up by legislation and will not introduce other new policies bearing on the energy sector in the future, even those that are likely to be implemented by various nations.” The IEA’s projections also include a low case for coal usage and a central position and, while the IEA does not endorse any particular scenario, Peabody omitted both the low case and central position in several of its SEC filings.
Pursuant to the settlement agreement, Peabody agreed (i) to include specific disclosures in its next quarterly report with the SEC and (ii) that in future SEC filings or communications with shareholders, the financial industry, investors, the general public and others (a) it will not represent that it cannot reasonably project or predict the range of impacts that any future laws, regulations and policies relating to climate change would have on Peabody’s markets, operations, financial condition or cash flow or (b) any citation to the IEA’s projections will include an explanation of the IEA’s various scenarios.
The NY Attorney General is also reported to be investigating ExxonMobil, under the Martin Act, over its climate change statements. While the Peabody settlement agreement reflects the Attorney General’s increased attention to climate change disclosures by energy companies, the effect may well ripple into other industries. In addition, members of the House and Senate have requested an update on the SEC’s efforts to implement the SEC’s 2010 guidance. Nonetheless, questions remain as to whether the obligation to disclosure climate change associated risks will, in fact, be action-forcing so as to result in a change in the behavior of public companies. Will those companies and the public take substantive steps to address the root causes and impacts of climate change or just continue to write detailed disclosures of the potential risks that pass muster with the regulators? Will those enhanced disclosures result in increased investor pressures sufficient to cause those companies to undertake serious, significant, and potentially costly, measures to reduce greenhouse gas emissions and become low-carbon?