Wednesday, March 9, 2016

Could New French Rules Lead to Better Corporate Disclosures About Climate Change Risks?

French Decree Enacting Energy Transition Law Might Provide US Financial Firms Pathway to Enhanced Reporting on Climate Change-Related Risks

Brandon Kline, Energy Law Fellow

The French National Assembly (pictured above) recently adopted the Energy Transition Law, broad legislation aimed at reducing French greenhouse gas emissions.

In the United States, federal securities laws require public companies to keep investors abreast of ‘known trends’ that affect their industry. For example, certain companies with exposure to climate-change impacts are required to disclose material risks posed by climate change in their Securities and Exchange Commission (SEC) filings.

A few weeks ago, I explained that, in 2010, the SEC issued guidance indicating that, in the context of climate change, four areas are particularly relevant to investors – legal, technological, political and scientific developments.

However, investors representing more than $1.9 trillion in assets continue to warn that oil and gas companies are not disclosing sufficient information about several converging factors that, together, will profoundly affect the economics of the industry. Meanwhile, a recent GAO report suggests that a lack of SEC enforcement actions has done little to incentivize meaningful disclosures about climate change.

To be sure, providing guidance to the regulated community in this context is understandably tricky. Accordingly, it’s worth paying close attention to new rules by the French Treasury Department to integrate climate-change factors into financial-disclosure requirements. In July 2015, the French National Assembly adopted the Energy Transition Law, broad legislation aimed at reducing French greenhouse gas emissions.

The provision included strengthened mandatory climate disclosure requirements for listed companies and introduced the first mandatory requirements for institutional investors as part of Article 173 of the Law for the Energy Transition and Green Growth. A summary translation of the Final Decree on the Implementation of Article 173-VI of the French Law for the Energy Transition describes the relevant provisions, which became French law on January 1, 2016.

The decree imposes reporting requirements on institutional investors and financial asset managers registered in France. It builds on the European Union-wide disclosure requirements due to take effect in 2017, pursuant to Directive 2014/95/EU of the European Parliament and Council in October 2014, according to Columbia Law School’s Justin Gundlach.

Contrasting the New French Decree with Existing US Securities Law.
U.S. disclosure requirements are primarily focused on public companies. In contrast, the French Decree targets institutional investors and asset managers (i.e, insurance companies, pension and social security funds), and others. Under French law, those who invest assets on behalf of others must now indicate how the companies in which they invest provide information to investors, shareholders, clients and beneficiaries about environmental, social and governance (ESG) factors.

Under U.S. securities law, Regulation S-K, Item 303 (commonly known as “Management’s Discussion and Analysis of Financial Condition and Results of Operations” or “MD&A”), requires public companies to disclose, among other things, “known trends or uncertainties that have had or that the registrant reasonably expects will have a material favorable or unfavorable impact on net sales or revenues or income from continuing operations.” 

Item 303 requires a company to disclose an investigation only if it “reasonably expects” the investigation will have a material adverse effect on the company. Thus, if management reasonably expects that government efforts to limit carbon emissions will have a material impact on net sales or revenue, then management must discuss and analyze this known trend in a disclosure to investors.

Some might argue that the French Decree is costly, off target, and will only indirectly result in increased disclosure. Still, the more direct approach favored in the United States has not satisfied institutional investors seeking improved corporate disclosure of material risks in the fossil fuel industry. As financial firms affected by the French decree begin to implement its provisions, no doubt the SEC and the regulated community will pay close attention to whether it leads to meaningful disclosure of known trends.

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