Companies bracing for mandatory climate change reporting want the SEC to keep those disclosures out of their annual 10-Ks and other documents exposed to potentially higher legal liability.
“Given that climate disclosures rely on estimates and assumptions that involve inherent uncertainty, it is important not to subject companies to undue liability, including from private parties,” a group of tech companies—including Amazon, Alphabet Inc., Autodesk Inc., eBay Inc., Facebook Inc., Intel Corp., and Salesforce.com Inc.—said in a joint letter to the agency.
The calls come as the SEC is preparing ESG rules that could force companies to report on a range of topics, from the risks they face from climate change to the diversity of their boards. The public comment period ended this week. The commission plans to release proposals on climate disclosures and other ESG reporting by October.
While climate disclosures are essential for tracking corporate commitments to combat global warming, the SEC should permit companies to exclude the information from filings like annual 10-Ks and quarterly 10-Qs, according to the letter from the tech companies.
Companies could report climate-related information in a “widely disseminated, publicly available manner” through their websites and other public reports, the Investment Company Institute said in a letter to the agency.
In exchange, the SEC shouldn’t let companies make generic or boilerplate climate disclosures, according to the group, which represents mutual funds.
“Coupling this expectation with protection from strict liability should promote more robust disclosure,” ICI said in the letter, signed by CEO Eric Pan.
An SEC representative didn’t respond to a request for comment.
Furnished v. Filed
Keeping climate disclosures out of periodic reports would allow companies to “furnish” the SEC with the information, rather than “file” it with the agency. The distinction could help corporations avoid some legal woes if their reporting isn’t perfect, as long as they make a good faith effort to provide accurate information.
Disclosures in some reports, like annual 10-Ks and quarterly10-Qs, are filed with the SEC, subjecting them to heightened liability for material misstatements or omissions.
Companies that furnish material to the SEC don’t face the same burden, though they still would face anti-fraud liability for misleading information.
The agency already allows companies to furnish disclosures in several instances, including a Dodd-Frank Act requirement for reporting oil and gas extraction, and mining payments to foreign governments.
The SEC could create a similar regime for greenhouse gas emissions, Chevron and Walmart said in letters to the commission. Representatives of Walmart met at least twice with SEC officials this year over possible climate disclosures.
Many companies are struggling with how to make ESG disclosures and appropriately back up what they say, Covington & Burling LLP partner Kerry Burke told Bloomberg Law.
“It’s trying to strike that right balance between getting the disclosure that people are really looking for and balancing what the liability profile looks like,” said Burke, who’s vice chair of Covington’s corporate group.
Support for furnishing climate disclosures in separate reports isn’t universal, however.
Companies should put this information into their annual 10-Ks, according to Ceres, a nonprofit organization founded by investors and environmentalists.
“Because climate disclosures tend to be outside SEC filings even when they are financially material, inconsistencies with the company’s financial reports or other SEC filings may go undetected,” said the group’s letter to the SEC, signed by CEO Mindy Lubber.
But companies could face major logistical challenges if they try to release ESG information at the same time as 10-Ks and other SEC filings, according to the Sustainability Accounting Standards Board, which has created a voluntary reporting framework for climate risks and other ESG topics.
The agency could require separate climate disclosures well after the 10-K reporting ends for companies, SASB said in a letter to the SEC. The New York State Teachers’ Retirement System endorsed the letter.
“Some investors have expressed to SASB that the availability of decision-useful sustainability information, including climate-related information, is more important than its location,” said the letter, signed by SASB CEO Janine Guillot.
(Michael Bloomberg, founder of Bloomberg LP, is the chairman emeritus of the SASB Foundation. Bloomberg Law is operated by entities controlled by Michael Bloomberg.)
SEC Chairman Gary Gensler hasn’t said where ESG disclosures should appear—or how the information should be verified.
Democratic SEC Commissioner Allison Lee has called for ESG disclosures to be audited much like financial statements, but also said it will take time for companies to be ready for the extra scrutiny.
Lee and Republican SEC Commissioner Elad Roisman have urged the agency to cut companies some slack when they report ESG information. Companies could have exposure to “numerous costly lawsuits” over new disclosures, Roisman said earlier this month.
The National Association of Manufacturers asked the SEC to allow voluntary audits, and electric and gas utilities asked the SEC to not to layer on additional testing.
Audit firms Ernst & Young LLP and Crowe LLP urged the SEC to clarify what type of outside verification should be provided. Auditors provide a range of assessments from the pricey, full financial statement audit, to less complex and cheaper reviews like those currently used to test voluntary ESG reporting.
The firms also warned that existing audit and assurance rules might need to be updated to align with any new ESG requirements.
Asset managers want third-party verification to ensure the information is not just reliable but meaningful.
“If these standards are not audited, or if there is weak enforcement of ensuring they are accurate, they will not be useful,” the investment ratings firm Morningstar Inc. told the SEC in its letter.