Proposed Legislation Would Require Public Companies to Significantly Expand Their Climate-Related Disclosures
On September 24, 2018, U.S. Senator Elizabeth Warren (D-MA), along with seven co-sponsors, introduced bill S.3481, the Climate Risk Disclosure Act of 2018 (the “Bill").
If enacted, the Bill would require public companies to disclose a substantial amount of new information about their exposure to climate-related risks. The disclosure would be intended to provide more qualitative and quantitative information about the financial risks that result from both exposure to climate change and climate change mitigation and adaptation. The text of the Bill contends “many sectors of the economy of the United States are exposed to multiple channels of climate-related risk," “companies have a duty to disclose financial risks that climate change presents," and the Securities and Exchange Commission (the “SEC") “has a duty to promote a risk-informed securities market." The Bill is available here and its status in Congress can be tracked here.
The Bill would amend the Securities Exchange Act of 1934 (the “Exchange Act") to include a subsection entitled “Disclosures Relating to Climate Change." The new subsection would direct the SEC to issue final rules requiring any issuer required to file an annual report pursuant to Section 13(a) or 15(d) of the Exchange Act to disclose in its annual reports information regarding:
(A) the identification of, the evaluation of potential financial impacts of, and any risk-management strategies relating to…physical risks posed to the covered issuer by climate change and transition risks posed to the covered issuer by climate change; and
(B) a description of any established corporate governance process and structures to identify, assess, and manage climate-related risks.
The Bill defines "physical risks" as financial risks to long-lived fixed assets, locations, operations, or value chains that result from exposure to physical climate-related effects, including: (i) increased average global temperatures; (ii) increased severity and frequency of extreme weather events; (iii) increased flooding; (iv) sea level rise; (v) ocean acidification; (vi) increased frequency of wildfires; (vii) decreased arability of farmland; and (viii) decreased availability of fresh water. And the Bill defines "transition risks" as financial risks that are attributable to climate change mitigation and adaptation, including efforts to reduce greenhouse gas emissions and strengthen resilience to the impacts of climate change, including (i) costs relating to international treaties and agreements, Federal, State, and local policy, new technologies, changing markets, reputational impacts relevant to changing consumer behavior, and litigation; and (ii) assets that may lose value or become stranded due to any of the costs described in clause (i).
The Bill also would require all covered issuers to disclose, among other things:
- an estimate of the amount of direct and indirect greenhouse gas emissions by the issuer and its affiliates in the period covered by the report (separated by each type of greenhouse gas);
- the total amount of fossil-fuel-related assets that they own or manage;
- how their valuation would be affected if climate change continues at its current pace;
- how their valuation would be affected if policymakers successfully restrict greenhouse gas emissions to meet the Paris Climate Accord's goal; and
- their risk management strategies related to the physical risks and transition risks posed by climate change.
In connection with the above-listed disclosures, all covered issuers would be required to include:
- a quantitative analysis to support any qualitative statements made by the issuer and the specific metrics used for the disclosure;
- a discussion of the short-, medium-, and long-term resilience of any risk management strategy of the issuer; and
- the total social cost of carbon emissions that are attributable to the issuer.
The SEC would establish a minimum "social cost of carbon," which would be used by issuers as the minimum price with respect to costs associated with carbon emissions.
In making these quantitative and qualitative disclosures, issuers would be required to consider (a) a baseline scenario that includes physical impacts of climate change, (b) a 2 degrees or lower scenario, and (c) any additional climate analysis scenario considered appropriate by the SEC. The term "2 degrees or lower scenario" means a widely-recognized, publicly-available analysis scenario in which human interventions to combat global climate change are likely to prevent the global average temperature from reaching 2 degrees Celsius above pre-industrial levels.
To support the disclosure requirements described above, the rules would be tailored differently for industries within specific sectors of the economy, including finance, insurance, transportation, electric power, non-renewable energy, and any other sector determined appropriate by the SEC. Additionally, the final rules would be required to include reporting standards for estimating and disclosing direct and indirect greenhouse gas emissions by a covered issuer and its affiliates, as well as reporting standards for disclosing the amount of fossil fuel-related assets owned or managed by an issuer.
In addition, issuers that engage in the commercial development of fossil fuels, which includes exploration, extraction, processing, exporting, transporting and any other significant action with respect to oil, natural gas or coal, would be required to include the following disclosures:
- an estimate of the amount of direct and indirect greenhouse gas emissions by the issuer that are attributable to each of combustion, flared hydrocarbons, process emissions, directly vented emissions, fugitive emissions or leaks, and land use changes;
- the sensitivity of fossil fuel reserve levels to future price projection scenarios, which incorporate the social cost of carbon into hydrocarbon pricing;
- the percentage of the reserves of the issuer that will be developed under a 2 degrees or lower scenario;
- the potential amount of greenhouse gas emissions that are embedded in proved and probable hydrocarbon reserves, presented by reserve type;
- the methodology used to detect and mitigate fugitive methane emissions; and
- freshwater consumption and the percentage of fresh water use that comes from regions facing water shortages.
Following effectiveness of the final rules, the SEC would be required to conduct an annual assessment regarding compliance by issuers and report on its assessment to congressional committees and to the public.
The future of the Bill is unclear. If it advances, the definitions and industry-specific requirements will be reviewed closely. If the Bill is enacted, the final requirements would be promulgated by the SEC through its rule-making process, including a public comment period. In any event, the Bill is further evidence of the increased calls and support from some politicians for disclosure regarding financial risks and costs of climate change and compliance with climate change mitigation efforts. (For example, see the voluntary framework developed by the Taskforce on Climate-related Financial Disclosures in the UK (available here) and public company support for many of the recommendations made by the report.)
Special appreciation to Eric Haitz for his assistance with the preparation of this post.