Corporate Governance

Regime Change and the SEC's Corporate Governance Agenda: #10 Disclosure of Environmental Policies and Practices

By J. Robert Brown

Is there much doubt that investors want greater corporate consideration of the impact of business on the environment, particularly on global warming?  Certainly Exxon found out that it was on the minds of its investors, including the Rockefellers. 

There are two regulatory problems in this area.  The first is the limit imposed by the Commission staff on shareholder proposals that seek to obtain information on business risk arising from practices by the company that can result in harm to the environment or public health.  These limits were set out in a staff bulletin back in 2005.  Institutional investors have already raised the issue with the Obama Administration.  Although no action letters are ordinarily left to the staff, the Commission could order a reversal of the policy.  Merely discussing it at a Commission meeting, without formal action, however, would likely be enough.  The staff is sensitive to the views of the Commission and, if they were expressed clearly enough at a discussion, would enduce the necessary change.

The more important reform concerns explicit disclosure obligations designed to provide investors with information on business impacts on the enviornment.  There is nothing explicit that requires companies to disclose information about greenhouse gases or their impact on the problem of global warming.  Regulation S-K has some provisions that tangentially touch on the subject.  Item 101(c)(1)(xii) requires disclosure of the "material effects that compliance with Federal, State and local provisions which have been enacted or adopted regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, may have upon the capital expenditures, earnings and competitive position of the registrant and its subsidiaries."  In addition, disclosure must occur of any material capital expenditures "for environmental control facilities."  Environmental disclosure may also occur if it arises in the context of material litigation or triggers trend disclosure under MD&A requirements.

There are several problems with these provisions.  First, only the Commission can enforce violations of Regulation S-K.  These are violations of the periodic reporting requirements under Section 13 of the Exchange Act.  No private right of action exists for the violation of these provisions.  Second, they are highly selective and almost designed to miss greenhouse gas and global warming issues.  Quite a bit of the activity in this area is unregulated and, as a result, does not trigger material litigation or expenditures. Nonetheless, it carries future risk of regulation, something that may be important to reasonable investors.

Under the prior regime, the SEC received a petition for regulatory reform in the area.  The Petition came from the Investor Network on Climate Change and noted the following:

• "The fundamental principle underlying the Commission’s disclosure requirements is that a public corporation must fully and fairly disclose all facts about its performance and operations that would be material to a reasonable shareholder’s investment decision. Efficient markets depend on the availability of information on corporate strategy, performance, and policies to give investors the insights they need to make investment decisions. Recent scientific, legal, and regulatory developments make it unavoidably clear that the risks and opportunities many corporations face in connection with climate change fall squarely within the category of material information that is required to be analyzed and disclosed in many corporate filings. Yet corporate disclosures of the risks and opportunities created by climate change lag behind these developments, and investors are left with little or in some cases no useful information about corporate exposure to these risks. Investors are responding to this information gap with increasing demand for more and better disclosure on climate risk that will allow them to make informed investment decisions."

The petition asked for an interpretive release clarifying the disclosure obligations.  In fact, something more substantive is necessary.  It is time for the Commission to amend Regulation S-K and the disclosure requirements for the annual report on Form 10-K to require meaningful disclosure of a company's contribution to the problem of global warming and the risk/business implications of the contribution.

Full post as published by The Race to the Bottom on December 29, 2008 (boomark / email).