As you know, there has been a fairly sustained clamor for the SEC to impose a requirement for climate change and sustainability disclosure. For example, in May, the SEC's Investor Advisory Committee recommended that the SEC "set the framework" for issuers to report on material environmental, social and governance information, concluding that "the time has come for the SEC to address this issue." (See this PubCo post.) However, SEC Chair Jay Clayton and others at the SEC have been fairly vocal about their reluctance to impose a prescriptive sustainability disclosure requirement beyond principles-based materiality. But what about a narrower request? A mandate for just a single piece of information? This rulemaking petition filed by Impax Asset Management LLC, investment adviser to Pax World Funds, a "specialist asset manager investing in the transition to a more sustainable economy," requests that the SEC "require that companies identify the specific locations of their significant assets, so that investors, analysts and financial markets can do a better job assessing the physical risks companies face related to climate change."
SideBar
Right now, many of the key players at the SEC appear to be opposed to imposition of a mandatory ESG framework or other prescriptive sustainability disclosure requirements. While SEC Chair Jay Clayton has acknowledged "the growing drumbeat for ESG reporting standards," in this article from Directors & Boards, he indicated that the nature of social and environmental components of ESG varies widely from industry to industry and country to country. As a result, the disclosure approach for "E" and "S" matters "cannot be the same, as issuers and investors approach each of them differently." With that in mind, when it comes to mounting calls for rulemaking that standardizes ESG disclosure, Clayton has been less than enthusiastic: "My view is that in many areas we should not attempt to impose rigid standards or metrics for ESG disclosures on all public companies. Such a step would be inconsistent with our mandate, would be a departure from our long-standing commitment to a materiality-based disclosure regime, and could effectively substitute the SEC's judgment for the company's judgment on operational matters." Instead of imposing marketwide ESG regulation, Clayton has favored the application of "the 'materiality' based approach to disclosure regulation. This has been the commission's perspective for 84 years and it has served our investors and markets very well. Keeping that perspective in mind is critical to our mission." He believed investors were much better served by understanding how each company looked at its business, its assets and risks. (See this PubCo post.)
And in a webcast interview in June with non-profit FCLT Global, Clayton continued to advocate principles-based sustainability disclosure. While there may be precise metrics that apply in some industries, such as property insurance, he observed, sustainability information generally tends to be subjective and forward-looking, which is not conducive to precise measurement. However, he did note that the staff looks at "heat maps" and frameworks from advocacy groups in developing issuer comments. Instead of prescriptive requirements, he would view the type of guidance that the Corp Fin staff issued in connection with COVID-19 disclosure as a good model for sustainability disclosure guidance. (See this PubCo post and this PubCo post.) (Note also that, in the same interview, Clayton seems to reject the idea the SEC will move away from quarterly periodic reporting, a rulemaking at the proposed rule stage on the Spring 2020 RegFlex agenda. See this PubCo post.)
In a recent speech, Commissioner Elad Roisman advised that, while he may "personally have strong convictions on certain ESG matters," he nevertheless has "serious reservations about imposing prescriptive requirements in this area. In my experience, and based on the many discussions I have had on the topic, this type of mandated disclosure is often fraught with subjectivity and agendas that are often unrelated to 'investor welfare.' In other words, I have seen too many people appear to blur their personal views on environmental and social issues with how they believe the federal securities laws should operate to regulate the actions of others."
And of course, there is Commissioner Hester Peirce, who has previously opined that the acronym "ESG" stands for "enabling shareholder graft." (See this PubCo post.) She has also criticized institutional investors for advocating ESG disclosure regulation. In Peirce's view, the "ESG tent seems to house a shifting set of trendy issues of the day, many of which are not material to investors, even if they are the subject of popular discourse."
That leaves only Commissioner Allison Lee on the side of prescriptive climate disclosure. Together with former Commissioner Robert Jackson, Lee has criticized prior proposals for their failure to address the topic of climate risk. "Estimates of the scale of that risk vary," she said, "but what is clear is that investors of all kinds view the risk as an important factor in their decision-making process. Yet it remains tough for investors to obtain useful climate-related disclosure. One argument against mandating such disclosure is that climate risk is too difficult to quantify with acceptable accuracy. Whatever one thinks about disclosure of climate risk, research shows that we are long past the point of being unable to meaningfully measure a company's sustainability profile." (See this PubCo post.)
The petition points out that research shows that
"severe precipitation, floods, fires, droughts, sea level rise, extreme heat, and the spread of tropical diseases and pests to temperate zones are often not random and or impossible to anticipate, but are linked to a warming climate. These changes pose risks not only to companies, but their investors, financial markets and the global economy. Climate change poses several types of risk. Transition risks—regulatory risk, the risk of litigation, reputational risks, and possible losses of competitiveness as the world moves closer to a low-carbon economy—often fall most heavily on the largest emitters. Physical risks, however, can happen to any enterprise, and depend not on emissions but on where the company operates, and where the major facilities are in its value chain. This is why investors need more precise physical location data from companies than most now provide."
The petition then highlights the findings of several scientific studies and papers that identify various levels of value at risk as a result of climate change—from a permanent loss of 5% of GDP to 20% or more, a reduction in global incomes by approximately 23% by 2100 and, just in the United States, a reduction in economic growth by up to one-third over the next century. While these estimates cover decades, the impact, the petition contends, is already being experienced. One source reported that 215 of the largest companies forecast $1 trillion in value at risk from climate change within the next five years. Standard & Poors has estimated that 60% of the S&P 500 (market cap of $18 trillion) hold physical assets that are at high risk of at least one type of climate-change physical risk.
The petition points out that the TCFD (Taskforce on Climate-related Financial Disclosure), has recommended that scenario analyses be performed to better understand the risks to companies' assets. But, the petition contends, without adequate disclosure of the location of key assets, scenario analyses are difficult to perform. For example, the petition observes, "a major manufacturing facility in a flat coastal location is far more vulnerable to both coastal cyclones and sea level rise than the same facility sited hundreds of feet above sea level." However, companies are not sufficiently precise in their reporting to enable investors to identify geographic locations of major facilities within states or countries, which is necessary to detect vulnerabilities and changing probabilities of future events, such as hurricanes, droughts and fires, in those locations. This information is not required by Reg S-K or by the 2010 staff guidance on climate change disclosure. The petition requests the SEC to
"require companies to list specific locations—at least street addresses, and preferably longitude and latitude—of all facilities whose loss or impairment would materially affect financial results. This information, which companies already hold and would not require significant new data gathering and compilation costs, would be very helpful to investors in assessing and pricing physical climate risks appropriately. Without this information, investors will be vulnerable to an increasingly frequent and severe set of shocks that might be mitigated or avoided with increased disclosure."
Originally published 13 July, 2020
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