I am pleased to be speaking on “Environmental Social Governance (ESG) an Emergent and Fast Growing Area of the Law” at the Maryland State Bar Association 2021 Legal Excellence Week, Corporate Council Institute on November 16, 2021. You can register to attend in person or online.
While there is much speculation about what the federal government will mandate in the coming days about ESG disclosures, little attention has been paid to existing Securities and Exchange Commission required climate change disclosures and the sea change that has taken place in those disclosures.
We are working with our public company clients, including ghost writing for many of their corporate counsel, auditors and other non law consultants, in a profound and notable transformation over the last year in what they disclose about the impact that “climate change may have on its business.”
Public traded companies are required to disclose material business risks to investors through regular filings with the SEC. In 2010, the SEC issued an interpretive release that provided guidance as to how existing disclosure requirements apply to climate change matters.
That 2010 Climate Change Guidance noted that, “depending on the circumstances, information about climate change related risks and opportunities might be required in a registrant’s disclosures related to its description of business, legal proceedings, risk factors, and management’s discussion and analysis of financial condition and results of operations.” The release outlined ways in which climate change may trigger disclosure obligations under the SEC’s existing rules. It articulated that legislation and regulations governing climate change, international accords, changes in market demand for goods or services, and physical risks associated with climate change, could each trigger a disclosure obligation.
There had been little change in how companies responded each year over the more than a decade since the February 8, 2010 effective date of that Guidance, but the groundswell of interest in matters of ESG, including by the Biden Administration, has resulted in significant changes in how companies will respond this year in annual reports and other disclosure documents.
In the more than 10 years that we have advised companies in this space, irrespective of the facts and circumstances of a particular company, the analysis was almost always: No disclosure required regarding the impact of legislation or regulation on climate change. No disclosure required regarding the impact of international accords on climate change. No disclosure required regarding the impact of indirect consequences of regulation or business trends on climate change. And no disclosure required regarding the physical impacts of climate change. As recent as last year most companies believed that acknowledging that climate change may have a negative impact on its business would be received punished by investors and others.
But in 2021 all of that has changed in nearly every instance. We have been working with companies on updating and making current their proposed annual filings (that admittedly, had all but universally been static for the last decade). In the emergent space of ESG with the change in how most of the public now perceive climate change it is now acceptable if not expected that companies will mimic those views.
At this moment when we are all waiting for the federal government to regulate matters of ESG, this blog post should remind companies of their obligations under existing federal securities laws and regulations to consider climate change and its consequences as they prepare annual disclosure documents to be filed with the SEC and provided to investors because while the law has not changed in 2021, the public sentiment about climate change has, and SEC disclosure is all about helping the public make informed decisions.