Advice to corporations from an influential law firm may leave investors wanting for more-useful climate-change disclosures from public companies.
“Disclosures in annual reports, especially on any ongoing risk, are almost always inadequate,” Julie Gorte, senior vice president for sustainable investing at Impax Asset Management LLC, told Bloomberg Tax.
“Investors have to build up their own picture of what such risks might do to company performance,” she said.
That picture could become harder to bring into focus.
Attorneys at Wachtell, Lipton, Rosen & Katz of New York said in a July 10 memo to corporate clients that public companies should scrutinize their statements and public disclosures relating to the effect “climate change may have on their operations.” State attorneys general use “allegedly inadequate disclosures” as a basis to begin investigations, the memo said.
A warning from the firm, which represents many major corporations, could have a significant impact on disclosures going forward, curbing some of the gains made over the last decade by investors and sustainability advocates to get more reporting out of companies.
The firm is representing ConocoPhillips Co. in a federal suit brought in January by New York City for claims related to “climate change” and “global warming.”
“Although the litigation brought so far has centered on the oil and gas industry, the underlying legal theories could extend to many other industries,” the Wachtell memo said. “The business community as a whole needs to view this development as a potential threat and take appropriate steps to combat it.”
Attorneys at Wachtell didn’t return email and phone messages seeking comment.
Advocates of more detailed climate-change disclosures tell Bloomberg Tax that companies have overall done a better job, but that may change given Wachtell’s advice and the Securities and Exchange Commission’s failure to cease prodding companies on climate issues.
The SEC last issued a climate change-related public comment letter in September 2016, when it asked Chevron Corp. to expand its risk factor disclosure related to California’s greenhouse gas emission regulations.
Duty of Auditors
Daniel Wiseman, a lawyer with the U.K.-based ClientEarth, said climate-related issues have clear financial implications for companies and their investors, making disclosure imperative. Auditors, which review corporate financial statements and other required disclosures, must make sure companies provide necessary information properly.
“There are real and increasing legal risks if they don’t,” he told Bloomberg Tax.
The auditing of the financial impacts related to climate change should be important to investors, who ought to engage with companies to demand board members, and possibly auditors, who are knowledgeable on sustainability issues, Wiseman said.
Beyond Oil Companies
Most of the regulatory action on inadequate climate disclosure has focused on fossil-fuel companies, and most of that on the major oil companies, Gorte said.
However, “the most carbon-intensive sector on the planet is utilities, by two orders of magnitude,” followed by the mining sector, she said. Additionally, utility firms may be more opaque than petroleum companies, providing little insight and making statements that one finds in countless annual reports, she said.
“Company disclosures of litigation risk are customarily limited to ongoing litigation, and then they don’t necessarily disclose much,” Gorte said.
ExxonMobil Corp. and BP Plc., being sued by the state of Rhode Island, are examples of companies that are involved in litigation over inadequate disclosures yet continue to provide “breathtakingly minimal” reports, “from an investor’s point of view,” she said.
“Legal counsel probably has a different view,” she added.
Wachtell said companies should factor the potential of such litigation into their review and assessment of the carbon footprints of their products and operations.
“And of course, if a company learns that a State Attorney General or city is contemplating litigation against or an investigation of it, it is critical both to raise the right defenses and to handle the situation in a way that minimizes the chances that litigation will actually be brought or will spread,” the firm’s memo said.