Justin Gundlach
Climate Law Fellow
In advance of the recent G-20 meeting in Ankara, Turkey, the G-20’s Finance Ministers and Central Bank Governors asked the international Financial Stability Board to hold a meeting “on the financial stability implications of climate change related issues.” Following that September meeting, the FSB published a proposal in November for “an industry-led disclosure task force . . . to develop voluntary, consistent climate related disclosures of the sort that would be useful to lenders, insurers, investors and other stakeholders in understanding material risks.” Details of the proposal are discussed below the jump.
This development is just the latest in a series. As the investment firm BlackRock put it in an October 2015 report, “You may or may not believe man-made climate change is real or dismiss the science behind it. No matter. Climate change risk has arrived as an investment issue.” Better understanding of climate change—its causes, effects, trajectory, and financial implications—has prompted responses on the part of corporations, NGOs, and regulators. Some corporations have begun imputing internal carbon prices; the Carbon Disclosure Project and Climate Disclosure Standards Board have motivated a growing list of corporations and governments to undertake climate change-related disclosures; and, most notably, regulators now encourage—with varying degrees of stringency and clarity—disclosure of climate change-related risks to investors and the public.
As reporting requirements take shape, so too do the legal implications of failing to meet those requirements. Also discussed below the jump are investigations by the New York Attorney General since 2007 into the adequacy of climate change-related corporate disclosures. Much as the FSB’s proposed task force could unify and give shape to currently inchoate climate change-related disclosure requirements, the New York AG’s investigation into ExxonMobil could highlight the consequences of efforts to dodge or game disclosure requirements in the U.S. and abroad.
Investigations first. In November 2009, the New York Attorney General resolved four of five investigations by agreeing to settlements with large publicly traded energy companies “concerning [each] Company’s analysis and public disclosure of the potential impacts that GHG legislation and climate change from GHG emissions might have on the Company’s operations and results.”[1] The fifth investigation, which involved Peabody Energy Corporation, the nation’s largest coal company, yielded a settlement just this month. The other four involved AES Corporation, Dominion, Dynegy, and Xcel Energy. All five were conducted under the Martin Act, a New York law that, like the U.S. Securities and Exchange Act, prohibits fraudulent corporate disclosures.
Notably, the initial round of settlements preceded the Securities and Exchange Commission (SEC)’s February 2010 issuance of interpretive guidance on how its requirements for corporate disclosures by publicly traded companies pertained to climate change-related risks. The SEC did not please many people with this move. While proponents of clear and firm climate change-related disclosures found it lacking, the 112th Congress debated S. 1393 and H.R. 2603—a proposal to rescind the action legislatively.
The 10-Ks filed by the above mentioned companies for fiscal years 2009 to 2011 reflect an evolution of sorts, followed by an equilibrium that has persisted since. For instance, whereas the AES Corporation in its FY 2010 10-K discussed Mexico’s efforts to “reduce the alleged effects of climate change,” its FY 2011 filing dropped “alleged” from the sentence. By 2012, the companies’ disclosures contained the content that has persisted since—content that is by no means uniform across companies. To illustrate, Dynegy states that the risks of climate change-related regulation are greater than the physical risks of climate change itself, while Xcel Energy observes that it faces risks not only from the physical risks of climate change and related regulatory measures but also from severely adverse regional economic effects that could follow from climate change-related events.
The most recent addition to this list of corporate actors investigated by the New York AG is ExxonMobil, which—the LA Times and InsideClimate News recently revealed—has spent tens of millions of dollars in a decades-long campaign to sow doubts about the reality of climate change even though it was among the first entities in the world to grasp that reality. The AG has not published the subpoena issued to ExxonMobil.
The FSB’s proposal for a disclosure task force does not hint at such investigations, penalties, or even a risk of public ignominy on the part of the companies it could affect. Rather, the FSB notes that climate change has given rise several types of risk relevant to the financial sector, that nearly 400 different corporate disclosure schemes exist, but that “[t]he wide range of existing schemes relating to climate or sustainability highlights the lack of consensus at this point about what effective disclosures in this area would consist of.” As a remedy, the FSB proposes a voluntary process for better articulating the particulars of what companies should disclose about their exposure to climate change-related risks. The FSB also emphasizes that “[t]he disclosure task force should not add to the already well-developed body of existing disclosure schemes,” but should instead work toward a set of recommendations that “incorporate the principle of materiality and . . . weigh the balance of costs and benefits.”
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The task force proposed by the FSB would focus on the substantive particulars of corporate disclosures related to climate change. The New York AG’s recent investigations have focused on companies that have sought—to varying degrees—to avoid telling investors and the public about material climate change-related risks. Both push toward greater uniformity and accuracy in companies’ articulation of the financial implications of climate change.
[1] The AES Corp., Form 10-K for Fiscal Year ending Dec. 31, 2009, SEC File No. 1-12291, at 85.
