Impact of Proposed SEC Climate Disclosures on Utilities

 By Cecilia Bremner, Law and Policy Clerk

NASA on The Commons 2017

All companies face great physical, transitional, and legal risks from climate change. For utilities specifically, these risks are numerous. They include exposure to natural disasters; regulatory uncertainty as environmental compliance requirements change; customer base variations; and inherent technology, supply, workforce, and cybersecurity threats. These risks also overlap with concerns over fuel uncertainty, asset divestment, business model overhauls, decommissioning, safety, and geopolitics. 

Stakeholders are becoming increasingly aware of such climate-related risks and are increasingly requesting more detailed climate-related disclosures from SEC registrants, including investor-held utilities. This has led to the current situation where utility companies are all at different stages of their environmental, social, and governance (ESG) journey and climate reports are inconsistent and potentially include greenwashing. In response, on March 21, 2022, the U.S. Securities and Exchange Commission (SEC) proposed a new rule to enhance and standardize climate-related disclosures. 

Adopting this new SEC rule “would require registrants [to] provide certain climate-related information in their registration statements and annual reports.” The rule proposes numerous climate-related disclosures broadly aligned with accepted climate disclosure frameworks such as the Task Force on Climate-related Financial Disclosures (TCFD). The disclosures proposed include reporting potential risks and material business and strategy impacts; Scope 1, 2, and 3 (if material or if the registrant has a Scope 3 target) greenhouse gas (GHG) emissions; other qualitative and quantitative climate risks such as financial impacts of severe weather events and natural disasters; and climate-related risk governance and risk-management processes. In addition, the rule would require registrants to provide plans to comply with their publicized environmental claims and would phase in assurance requirements for certain SEC filers. 

These reporting requirements signal that all public companies need to transition to investor-grade reporting, and quickly. Such a transition would involve accelerating climate-related reporting processes and building or transitioning to effective reporting controls. PricewaterhouseCoopers (PwC) identifies five actions that every company should consider now for this transition: 1) form a cross-functional team for ESG performance accountability; 2) ensure expected data is appropriately collated for regulators; 3) establish an ESG strategy; 4) upskill corporate leadership; and 5) prepare for independent, third-party assurance. 

In addition to these five generally applicable actions, PwC also identified three considerations for utilities specifically. First, utilities should consider how they will delineate between routine costs of supplying reliable energy to customers and recovering from typical weather incidents versus the proposed SEC climate-related disclosures. Second, utilities should consider how they will deal with Scope 3 emissions that are material or for which they have set GHG targets. Even with decarbonization efforts, Scope 3 emissions will likely be material for utilities in “industry-specific, high-emitting categories such as ‘fuel and energy-related activities’ and ‘use of sold products.’” Third, utilities should consider how they will address the challenge of providing accurate and reliable data by zip code in the proposed rule’s accelerated timeline. 

Despite such challenges, adopting the proposed SEC rule is likely to drive real action in the transition to a low-carbon economy and utilities can be a major player. Utility operations result in Scope 2 emissions which are indirect emissions from purchased electricity, steam, heating, and cooling. In 2020, Scope 2 emissions accounted for 25 percent of U.S. GHG emissions. Transitioning to low-carbon power can therefore have a significant impact on reducing overall U.S. GHG emissions. 

Reducing Scope 2 emissions is also one of the initial and increasingly more economical decisions. Utilities focused on clean energy and low-carbon energy will have a competitive advantage over higher carbon footprint companies. Stakeholders will trend towards supporting companies responsible with their emissions and other climate impacts, as we are already seeing. Thus, utilities that take the initiative to transition to a renewables-based grid and build resilience against climate change will capture a significant portion of the market in transition while also protecting their business in the long-term. 

Furthermore, U.S. investor-owned utilities are in a good position to incorporate the proposed SEC rule. The industry already has an ESG sustainability reporting template. This template was last updated in May 2021, after the SEC announced its plans to release the proposed rule. It seems the energy sector has therefore, seriously considered how to properly report climate information for the industry and that those utilities already using the industry template are in a good position to adapt their climate reports to any final SEC rule.

Even if this proposed SEC rule does not go through, U.S.-based companies with entities abroad will likely have to comply with equivalent international climate-related reporting and measures like the European Commission’s Corporate Sustainability Directive (CSRD). In addition, although the concept of materiality does not create a specific duty to disclose climate-related matters, as climate issues become increasingly significant for business and investment decisions, public companies may find they need to report climate matters to the SEC under the agency’s materiality principle. Whether or not this proposed SEC rule is adopted, climate-related disclosure requirements are coming. Utilities should prepare for this inevitability by ensuring their own internal climate reporting mechanisms are investor-grade and that they are transitioning their product to reliable clean and low-carbon energy. 

The blogs posted on Charged Debate reflect the writers' opinions in their individual capacities, and do not necessarily reflect the perspective of the Green Energy Institute, Lewis & Clark Law School, Lewis & Clark College, or the writers’ past, present or future employers or other associations. Any information in any blog on Charged Debate is meant purely for general educational purposes, does not constitute legal advice and should not be relied upon for any purpose. No representations or warranties, express or implied, are made with respect to any content in any blog posted on Charged Debate.

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.

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.

The SEC Should Make It Easier to Give a **** About Climate Change

On Climate Change, Capital Markets and Securities Disclosures

By Brandon Kline, Energy Law Fellow

 

Former California Governor Arnold Schwarzenegger

A political heavyweight recently shared an open letter to his followers under the heading, “I Don’t Give a **** if we Agree About Climate Change.” This line was pulled, not from the journals of noted author and naturalist Henry David Thoreau. Rather, it's former California Governor Arnold Schwarzenegger, imploring his Facebook followers to open the door to “a smarter, cleaner, healthier, more profitable energy future.” The writing on the wall suggests that the Terminator is on point. 

The underlying sentiment here reflects increasing concerns about the effects of greenhouse gas emissions on the environment and the economy, which have spurred international accords, federal regulations, and state and local measures that have had a material impact in the United States. The movement to tackle climate change should compel business leaders to consider adaptation strategies that prepare investors for the new normal.

Fossil-fuel companies are profoundly vulnerable to this dynamic; particularly when it comes to publicly traded companies. As previously noted, ExxonMobil provides a recent example of the ambiguous standard that fossil fuel companies face for public disclosures about climate change.

The main issues surrounding SEC disclosure laws as they relate to climate change have to do with what level of ongoing disclosure and governance obligations are placed on issuers like Exxon whose shares are publicly traded. This is not an easy task but could certainly be better defined and enforced by the federal government.

The Reasonable-Investor Standard Determines Materiality.

Congress established a framework based on the mandatory disclosure of information by the major participants in our securities markets—issuers, underwriters, national exchanges, broker-dealers and insiders—according to a securities regulation expert who has studied more than 800 federal court cases. 
The core doctrine in federal securities law rests on a single word – materiality. As a general rule, facts or information must be material before a legal obligation to disclose is triggered.

Under federal securities laws, certain companies with exposure to climate change risks are required to disclose material risks posed by climate change in annual filings with the Securities and Exchange Commission (SEC). See the Securities Exchange Act of 1934. The SEC in turn reviews these filings from the perspective of the reasonable investor.

SEC Evaluates Materiality in Four Broad Areas.

In February 2010, the SEC released guidance acknowledging the material risk posed by climate change. The SEC noted that four broad areas may create new opportunities or risks for registrants – legal, technological, political and scientific developments about climate change – including potential “decreased demand for goods that produce significant greenhouse gas emissions.” 

For example, the U.S. Government Accountability Office (GAO) identified a beverage company that disclosed in its filing that extreme weather conditions could disrupt its supply chain, reduce water availability, or affect demand for its products, resulting in adverse impacts on its business.

The SEC’s 2010 Guidance was preceded by petitions for interpretive advice submitted by large institutional investors and others. While more companies started making climate-related disclosures after the SEC’s guidance was issued, as noted below, there does not appear to be much improvement since then.

A large number of companies fail to say anything about climate change in their annual SEC filings, according to independent industry observers.

A GAO report released last week concludes that SEC staff have not filed any actions concerning climate-related disclosure issues since releasing the 2010 Guidance. This suggests two possible inferences – either the clarity of the 2010 Guidance resulted in 100% compliance, or the SEC is falling down on the job.

Investor Response Suggests Materiality Standard is Fundamentally Flawed.

Local and state governments, as well as institutional investors, continue to argue that SEC rules enable oil and gas companies to provide little or no information to investors about the range of risks fossil fuel companies face from existing and future laws and trends, such as those related to carbon pricing, pollution and efficiency standards, removal of subsidies, fuel switching and other factors that may reduce demand for oil and gas.

The key standard imposed to trigger public disclosure of climate-change risks is fundamentally flawed because it hasn’t provided investors with sufficient information about material risks, which constitute “known trends” under SEC rules.

The response of industry watchdogs and large investors, together with the anemic number of climate-related disclosure violations referred to the SEC Division of Enforcement, leads to the conclusion that SEC should strengthen disclosure requirements through casting a wider net for climate-related information.

Common Sense Approaches to Increasing Disclosure.

There are a variety of straightforward approaches the SEC could take to increase disclosure and create a more robust materiality standard.

•               Track the number of comment letters sent to companies suspected of violating climate-related disclosure requirements, in addition to documenting the cases referred to the SEC Division of Enforcement; 

•               Compare a company’s annual filings with its voluntary reporting, public statements and lobbying activity;

•               Require companies to post all climate-related statements and SEC filings on either the registrant’s website or on EDGAR, the SEC’s online public disclosure system.

•               Monitor climate-related statements made by registrants in a variety of settings, including climate-related statements in administrative proceedings (e.g., notice and comment), court filings, press statements and lobbying activity (i.e., third-party, interest-group statements made on the company’s behalf to regulators).

This approach ultimately closes a regulatory loophole, creating potential liability for omissions and misleading statements attributable to organizations that act as a conduit for corporate interests. Adjusting the current standard to encourage companies to disclose more information about supply chain risks will ultimately lead to better investment decisions, as well as a means for consumers to pay closer attention to the risks of climate change.