Climate Change Risks Surge in Companies’ Annual Reports to SEC

Big public companies’ disclosures about climate change risks in their annual reports surged last year, amid growing pressure from regulators and investors.

The number of current S&P 500 members citing climate change or greenhouse gas under risk factors in their annual 10-K filings with the Securities and Exchange Commission almost quadrupled in one year, from roughly 60 companies in 2019 to at least 220 companies in 2020, according to a Bloomberg Law analysis.

The universe of companies now making climate disclosures is almost as diverse as the S&P 500 itself and includes firms like AT&T Inc., Chevron Corp., Gilead Sciences Inc., and PepsiCo Inc.

The influx of disclosures came as interest in socially responsible investing was on the rise and overseas regulators took notice in the lead-up to the Biden administration. And the pressure is only increasing as new SEC leadership is strongly encouraging, and may eventually require, climate risk reporting.

“In 2020, did people know when they were filing their 10-Ks that Joe Biden was going to be president? No,” said Margaret Peloso, a Vinson & Elkins LLP partner, who focuses on climate change risk. “But many of them may have been responding to this combination of investor pressure and if they had exposure in Europe.”

The European Union in 2018 began requiring big companies to disclose how they handle environmental and social matters. Investors “need to know” about companies’ climate impacts, according to the EU rule’s guidelines.

Larry Fink, CEO of investment firm BlackRock Inc., earlier this year urged companies to disclose how they’re transitioning toward a net-zero economy by 2050. The Investment Company Institute, which represents funds, also has called on the SEC to make companies provide more robust disclosures about climate risks.

Companies appear to be getting the message as the SEC joins the chorus. As of March 18, more than 180 S&P 500 members have discussed the risks of climate change or greenhouse gases in their 2021 annual reports, on pace to surpass the 2020 tally.

“In my view, this is due to pressure from the SEC—especially under the current administration—for better-quality climate disclosures from public companies,” said Sansanee Dhanasarnsombat, principal legal analyst at Bloomberg Law who focuses on environmental, social, and governance issues.

SEC Pressure

Acting SEC Chair Allison Lee has made corporate disclosures on climate and other ESG matters a top priority since she became the agency’s interim leader in January. She’s hired an ESG policy adviser, launched an ESG enforcement task force, and directed the agency’s corporate filing reviewers to look closer at ESG disclosures, among other actions.

Corporate reporting about climate change isn’t necessarily required and last faced significant SEC attention during the Obama administration. The agency issued guidance in 2010 that reminded companies to report the effects of climate-related legislation, regulation, and international accords, as well as other climate developments, if material to investors.

Alaska Air Group’s 2009 10-K filing included one greenhouse gas mention—focused on efforts by the Obama administration to pass legislation aimed at reducing greenhouse gas emissions. “We do not believe legislation is necessary to motivate airlines to reduce fuel burn and, in turn, reduce emissions,” it said.

The company’s 2021 10-K mentioned the term four times. It highlighted a collaboration with Microsoft Corp. to use sustainable fuel and reduce the carbon footprint of Microsoft employees’ travel. The filing also pointed to the increased public focus on airline industry emissions and said that the company recognizes the role it must play to reduce climate impacts.

Disclosure Spike

In the years immediately following the SEC’s 2010 guidance, mentions of climate change and greenhouse gas jumped among S&P 500 companies, data show.

Bloomberg Law looked at mentions of “climate change,” “greenhouse gas,” or “greenhouse gases” in any portion of company 10-Ks, not just the risk factors section.

Just under 100 companies in the index—as compiled by Bloomberg L.P.—used these terms in 2009 10-Ks. That number shot up to over 200 the following year, and remained at roughly the same level in 2011 and 2012.

But climate disclosures leveled off as the SEC turned its attention elsewhere. The number of companies mentioning climate change in their 10-Ks hovered between 150 and 175 from 2013 to 2015 and didn’t approach 200 again until 2019.

Then, the number of companies mentioning the issue in their annual reports—in the risk factor section and elsewhere—skyrocketed to 342 in 2020.

The types of companies mentioning these environmental topics have also become much more diverse. In 2009, the energy or oil and gas sectors accounted for nearly half of the companies mentioning climate in their 10-Ks.

As of mid-March 2021, only 18% of S&P 500 companies discussing environmental issues in their 10-Ks are energy providers or involved in the oil and gas supply chain. Insurers, financial institutions, chemical makers, and life sciences companies have all accounted for the uptick in diversity over the past 12 years.

“For those that are paying attention, I think there’s a lot of movement in that direction,” said Mayer Brown partner Christina Thomas, a former senior adviser at the SEC. “I think it’s likely that companies are considering what that disclosure looks like for them and what effect it has on their business.”

Risky Business

Climate change and greenhouse gas mentions in the risk factor sections of 10-Ks has followed a similar trajectory to overall 10-K mentions during the past five years.

Roughly 46 companies in the current S&P 500 cited these issues as risks or as part of a larger, environmental risk to their businesses in 2017, Bloomberg Law data show. That number dropped slightly in 2018 before rising to nearly 60 in 2019.

How climate change and greenhouse gas are addressed in these 10-Ks varies. The disclosures are often very specific for energy companies and other sectors where environmental impacts have long been watched.

Diamondback Energy Inc. mentioned climate change 14 times in its 2020 10-K, with several references to regulation and international efforts such as the Paris Agreement. The company said “environmental activism” from investors and potential climate-related litigation from private parties could interfere with its business activities.

Diamondback also said that rising temperatures and extreme weather could throw a wrench into production and increase costs. The Allstate Corp. and other insurance companies struck a similar tone in their disclosures, anticipating more policyholder claims from climate-related weather events.

The recent upswing in climate disclosures will likely continue, Peloso said. But some companies may refrain from reporting unless there’s a strict SEC mandate, she added.

“Probably every company should be thinking about some impact, whether it’s a transition risk or a physical risk or a change in how they’re going to get their energy, whatever that might be,” Peloso said. “But you could see it becoming material to different companies at different rates.”