Environmental Impact Disclosure and the SEC
By Dorian Hawkins, Staff Contributor
The U.S. Securities and Exchange Commission (SEC) requires publicly traded companies transparently to disclose material business risks to investors through regular filings. It’s time that the SEC began to take its Guidance seriously, and to bring enforcement actions against companies that fail to comply with the environmental disclosure requirements that it has articulated.
On January 27, 2010, the SEC voted to publish Commission Guidance Regarding Disclosure Related to Climate Change (the Guidance). The Guidance clarifies how publicly traded companies should apply already existing SEC disclosure rules regarding the risk that climate change developments may have on their businesses to certain mandatory SEC financial findings. . The disclosure requirements seek to increase public access to corporate environmental information and to help maintain a level playing field for environmentally responsible companies. Like all SEC disclosure requirements, the environmental disclosure requirements are intended to encourage responsible behavior by companies. The simple concept is merely that having to disclose environmental risks will make companies less likely to engage in environmentally detrimental activities.
“…the over-disclosure of information results in more harm than good.”
The term “material” is often construed to require “a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the ‘total mix of information’ made available.” TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438 (1976). There are strong arguments to be made that information related to a company’s impact on climate change does not properly constitute “material” information that needs to be disclosed. In fact, many companies see the impact of a company’s operations on climate change to be so speculative, the over-disclosure of information results in more harm than good.
Nevertheless, in spite of the reluctance of companies to comply with the environmental disclosure requirements, and in spite of the fact that, arguably, companies should be making environmental disclosures purely in order to comply with the already established definition of “materiality,” the SEC has yet to prioritize enforcement of its Guidance.
There are a few theories for why the SEC has delayed enforcement. For example, some believe that the SEC simply has better things to do: 2010, the year of the Guidance, was of course not long after 2008 and 2009. That dark period of time when the securities markets were bottoming out, and the investing public, faith shaken and hope dwindling, found itself staring down into what many dubbed an economic “abyss.” Some perhaps more cynical observers believe that the unpopularity of the SEC’s Guidance was purely to blame. Shortly after the Guidance was issued, it was seen as controversial and even prompted (unsuccessful) legislation in the 112th Congress to repeal it.
“[…] it seems to be time for the SEC to take climate change seriously.”
Excuses aside, climate change is happening. We are admittedly wary of the ability of the current definition of “materiality” adequately to deal with environmental impact disclosures. That being said, whatever the rationale for the SEC’s failure zealously to enforce its Guidance, it seems to be time for the SEC to take climate change seriously.
Many agree that the financial sector will consist of far fewer climate change deniers the very minute that it begins negatively to affect the “bottom-line.” Accordingly, by making it industry practices for corporations to disclose the impact their operations have on the environment, the SEC is positioned to take a stance on the climate change debate that can effectively disincentivize environmentally irresponsible behavior. It’s time that they did that very thing. Enforcing the need for the disclosures may not be “popular” with certain members of Congress or the companies who find themselves paying lawyers more money to provide more information for investors to ignore. But with cities like Miami struggling to find viable solutions for their subaquatic fates, it could take a lot more than AIG bailouts and hefty Countrywide/Bank of America fines to fix this problem should the SEC refuse to get ahead of it.