Fear of Forward Looking Statements: Climate Reporting and the TCFD

Posted on July 18, 2018 by Christopher Davis

Risks relating to climate change are becoming increasingly material to companies in a broad range of sectors, to investors who own their shares, to banks that lend to them, to insurers that insure them, to communities where they operate, and to regional and global economies. Climate-related factors including energy transition from fossil fuels to renewables, extreme weather events and water scarcity are having increasing impacts. As a result, climate-related disclosure has become a hot topic, or should be, as companies are required by the Securities and Exchange Commission (SEC) and other regulators to disclose their material climate-related risks.

In the wake of the 2015 Paris climate agreement, the Task Force on Climate-Related Financial Disclosures (TCFD) was created by the G20’s Financial Stability Board in 2016 to develop consistent, voluntary standards for companies, investors and insurers to report climate-related financial risks and opportunities. The task force was chaired by Michael Bloomberg, and comprised of 32 members from major global corporations, financial institutions, corporations, accounting firms, credit rating agencies and other organizations. The TCFD issued a final report presenting its Recommendations [insert link] for such disclosures in June 2017. The Recommendations have been endorsed by more than 250 companies, banks, institutional investors, insurers and other organizations.

The TCFD Recommendations focus on two kinds of financially material climate-related risks: transition (legal/policy, technology, market, reputation) and physical risks. They call for disclosures in four areas: (1) Governance of climate-related risks and opportunities, (2) Strategy for identifying and addressing climate-related impacts, (3)  Risk Management measures to assess and manage relevant risks, and (4) Metrics and Targets including reporting Scope 1, 2 and 3 greenhouse gas emissions and metrics and targets to measure and manage them.

While the TCFD Recommendations have garnered considerable attention and support, notably from institutional investors, relatively few companies have so far committed to report in accordance with the Recommendations. There are various reasons for this, including inertia, cost and advice from inside and outside counsel about the purported liability and competitive risks associated with the kinds of forward-looking statements called for by the Recommendations. Indeed, disclosures consistent with what the TCFD recommends would be much more substantive, revealing and useful than the generic boilerplate disclosures of climate and other environmental risks that commonly appear in SEC filings.

Corporate counsel often provide conservative advice on disclosures in SEC and other mandatory corporate financial reporting. Federal securities laws provide corporate issuers with safe harbors for forward looking statements (typically focused on projections of future financial results) where accompanied by meaningful cautionary statements. Also relevant here is the SEC’s 2010 “Guidance Regarding Disclosure Related to Climate Change,” which highlights mandatory reporting requirements under SEC Regulation S-K for financially material climate-related risks, including the impact of legislation or regulation, international accords, indirect consequences of regulation or business trends, and physical impacts.

While caution and risk aversion are hallmarks of typical legal advice, I would argue that good, thoughtful disclosures consistent with the TCFD Recommendations are likely to have a range of benefits to the disclosing companies, and limited risks. Doing the internal work across disparate corporate functions necessary to address the TCFD Recommendations will improve a company’s understanding and management of evolving climate-related risks and opportunities. Good, meaningful disclosures require homework that underpins good corporate governance, risk management and strategic planning. What gets measured gets managed, and the TCFD Recommendations call on companies to assess and manage climate risks and opportunities, and to report to stakeholders on how they are approaching these issues.

Companies responding in a timely and effective way to the accelerating economic and physical changes brought by climate change can be expected to have a competitive advantage over their peers that fail to do so. Likewise, companies that meaningfully and credibly disclose how they are responding to material climate risks and opportunities, as called for by the TCFD, should enjoy a competitive advantage over their competitors who do not. A range of stakeholders (including current and prospective customers and employees) are likely to respond more favorably to companies that make a good faith effort to comply with evolving best practice disclosure standards. The likelihood of being sued for securities fraud based on such well-grounded climate disclosure seems low. By contrast, the risks of successful claims of non-disclosure and misleading disclosure for companies that fail to meaningfully disclose climate-related risks affecting their business seem quite real, as suggested by the investigations of ExxonMobil’s climate-related disclosures. The market generally rewards leaders that, to paraphrase hockey great Wayne Gretsky, are skating to where the puck is going rather than where it has been, and are early responders to global megatrends like climate change.

Corporate Disclosure of Climate Change Risks Since the SEC Interpretive Guidance

Posted on August 3, 2012 by Christopher Davis

In February 2010, the U.S. Securities and Exchange Commission (“SEC”) issued interpretive guidance that clarified corporate disclosure obligations regarding climate change-related risks and opportunities. While the guidance didn’t create any new legal requirements, it indicated that climate-related issues can have a material impact on companies that requires appropriate disclosure. It also offered examples of the ways in which companies may be impacted, including from regulations, international accords, litigation, and physical impacts from water quality and quantity issues. 

A recent Ceres report, “Physical Risks from Climate Change: A Guide for Companies and Investors in Disclosure and Management of Climate Impacts,” released in May 2012, highlights the economic impacts of extreme weather events on companies and their supply chains in seven key sectors.

More than two years after the release of this guidance, what is the state of corporate disclosure on climate change issues? Two recent reports by Ceres examined climate-related disclosure in multiple sectors.

Clearing the Waters: A Review of Corporate Water Risk Disclosure in SEC Filings,” released June 18, 2012, examined corporate disclosure on a key climate-related issue—water risks—to see what impact the interpretive guidance had on disclosure practices. The report analyzes changes in water risk disclosure by more than 80 companies in eight water-intensive sectors: beverages, chemicals, electric power, food, homebuilding, mining, oil and gas, and semiconductors. It found that significantly more companies are disclosing exposure to water risk in 2011 compared to 2009, with a focus on physical risk. For example, 87 percent of companies surveyed now report physical risk exposure versus 76 percent in 2009, with the biggest increases coming from the oil and gas sector. There was also a meaningful increase in the number of companies connecting water issues to climate change as part of a long-term trend.

The report recommends, however, that companies make further efforts to include quantitative data and performance targets in financial filings to clarify how they are actually responding to these water-related risks. Without this level of specificity, as well as more information on water management systems, it remains difficult for investors to incorporate these factors into their decision-making. 

Another new Ceres report, “Sustainable Extraction? An Analysis of SEC Disclosure by Major Oil & Gas Companies on Climate Risk and Deepwater Drilling Risk,” released August 2, 2012, examines climate change disclosure in one carbon-intensive industry: oil and gas. The report examined the financial filings that ten of the world’s largest oil and gas companies filed in 2011, a year after the interpretive guidance was issued. While six of the ten companies provided fair disclosure on efforts to manage their own greenhouse gas emissions, the disclosures reviewed in the report were generally disappointing. Particularly on regulatory risks—both direct and indirect—the level of specificity, comprehensiveness, and quality of analysis varied widely across the ten companies’ filings, showing a clear need for further attention and due diligence on material climate risks.

Climate change is a complicated issue for companies to address in their financial filings, particularly with emerging and shifting regulatory regimes and the complexity of modeling the physical impacts of a changing climate. Good climate disclosure that meets the requirements of the SEC guidance and is useful to investors requires the collaboration of a company’s senior legal, environmental, financial and operational managers and advisors. The above-referenced Ceres reports provide a window into the current state of climate-related disclosure and offer recommendations for companies to improve how they address their climate-related risks.