INVESTING IN THE FUTURE: WHY THE SEC SHOULD REQUIRE A UNIFORM CLIMATE CHANGE DISCLOSURE FRAMEWORK TO PROTECT INVESTORS AND MITIGATE U.S. FINANCIAL INSTABILITY.

Author:Bishop, Robyn
Position::COMMENTS
 
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  1. INTRODUCTION 493 II. CLIMATE CHANGE WILL AFFECT THE U.S. ECONOMY AND A WIDE VARIETY OF INDUSTRIES IN MATERIAL WAYS 497 III. IN ORDER TO MITIGATE THE ECONOMIC IMPACTS OF CLIMATE CHANGE, THE CURRENT SEC CLIMATE RISK DISCLOSURE REQUIREMENTS SHOULD BE SUPPLEMENTED BY A MORE STRINGENT STANDARDIZED FRAMEWORK SUCH As SASB OR TCFD 499 A. Two Major Problems Exist with the SEC's Current Approach--Lack of Enforcement and Lack of Uniformity--That Can Be Resolved with a Uniform Disclosure Framework 500 B. SEC Disclosure Requirements and Regulation S-K: An Overview 502 C. Sustainability Accounting Standards Board (SASB): An Overview 503 D. Task Force on Climate-Related Financial Disclosure (TCFD): An Overview 504 E. Implementing a Uniform Climate Disclosure Framework, Such As SASB or TCFD, Offers Significant Benefits to Investors and Eliminates the Current Lack of Enforcement and Uniformity. 505 IV. THE BENEFITS OF ADOPTING A THIRD-PARTY DISCLOSURE FRAMEWORK OUTWEIGH THE POTENTIAL CHALLENGES, PROVING IT IS THE BEST OPTION FOR IMPROVING THE FUTURE OF CLIMATE RISK REPORTING IN THE UNITED STATES 506 A. A Mandatory Disclosure Framework Would Ensure the Best, Most Comprehensive Information Reaches Investors and Would Greatly Increase Compliance 507 B. Key Reasons to Endorse Adoption of a Third-Party Disclosure Framework Include Increased Efficiency, Access and Attention to Industry Expertise, and Improved Compliance 508 C. Opponents May Argue Against Adoption of a Third-Party Disclosure Framework Because of Potential Pohticization, Lack of Accountability and Objective Evaluation by Third Parties, and Potentially High Costs for Regulated Entities 511 V. A COMPARATIVE CASE STUDY OF LEED GREEN BUILDING STANDARDS FURTHER REVEALS THE ADVANTAGES OF ADOPTING A UNIFORM DISCLOSURE FRAMEWORK 514 A. Key Similarities Between LEED and SASB/TCFD Include Their Motivations for Formation and Their Industry-Backed, Research-Based Standards, Which Make Them Suitable for Federal Government Adoption 516 B. Government Adoption Models of LEED Standards Provide Several "Lessons Learned," Suggesting that SASB/TCFD Must Be Implemented at a Federal, Mandatory Level 518 VI. CONCLUSION 519 I. INTRODUCTION

    Climate change is one of the most profound and complex issues facing the United States and global economies today. In 2014, the Intergovernmental Panel on Climate Change noted that "[e]ach of the last three decades has been successively warmer at the Earth's surface than any preceding decade since 1850." (1) The long-term, global scale of the issue makes it uniquely challenging, especially for businesses and economies trying to predict their economic futures. (2) In particular, international reduction of greenhouse gas emissions shows a movement away from fossil fuel energy and other related industries. (3) This transition to a lower carbon economy requires significant changes, which may disrupt economic sectors and industries, leading to financial shocks and sudden losses in global economic value. (4) Both public corporations and the investment and financial community must face the realization that climate change risks will impact the economy. First, companies use information about risks to price assets, allocate capital, and prepare for abrupt changes in stock markets. (5) In turn, investors rely on companies reporting accurate information across industries to make important short- and long-term investment decisions, contributing not only to the health and prosperity of the stock market, but also providing funding for public companies. (6) Thus, in order to protect investors, promote financial stability, and help mitigate the impacts of climate change, U.S. securities regulators must find an effective way to communicate accurate, decision-useful climate risk information.

    Over the past several years, many securities regulators and stock exchanges have recognized that information on the "environmental, social, and governance" (ESG) performance and risk of companies may be material to investors and financial markets and may include climate change risks. (7) ESG reporting, sometimes referred to as "sustainability reporting," extends beyond the three listed dimensions to a range of nonfinancial information that indicates strategic and business risk, effects on key stakeholders, and sources of capital. (8) Nonfinancial reporting seeks to tell a company's "whole story" through intangibles including "brand, talent, customer base," regulatory hurdles, and many other factors potentially important to investment decisions. (9) While ESG concerns span more broadly than climate change, an increased sensitivity to the potential implications of climate change on investment decisions have led many organizations to attempt to improve communication of this information to investors. (10) Investors receive risk information, both financial and nonfinancial, via annual reports filed by public companies with the United States Securities and Exchange Commission (SEC).

    In the United States, the SEC regulates investment and corporate disclosures. (11) Successful investing depends on an investor's ability to recognize factors that influence the market's valuation of a company and then allow the investor to evaluate the accuracy of that valuation. (12) SEC corporate disclosure regulations require companies that sell securities in the stock market to register with the commission, the purpose of which is to disclose important financial and nonfinancial information that enables investors to make a decision about whether to invest (purchase securities) in a company. (13)

    The SEC plays a significant role in regulating public companies by mandating certain financial and nonfinancial information be disclosed to investors in annual 10-K reports. (14) The mission of the SEC is to "protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation." (15) A 10-K report contains an annual snapshot of a company and requires the company to disclose material information and risks to investors. (16) As defined by the United States Supreme Court, "material" means a "substantial likelihood" that, omission of particular information would be viewed by a "reasonable investor as having significantly altered the 'total mix' of information made available." (17) In particular, the SEC's Regulation S-K contains guidelines that ensure public companies make appropriate disclosures. (18) The SEC issued an update to Regulation S-K in 2010, stating that material disclosures could include climate risk. (19) This was an important first step in that it recognized the potential impact of climate change on public company performance, but fell short of actually implementing an adequate and consistent set of requirements.

    In 2014, global agreement related to the risks of climate change among business and financial institutions culminated when a group of 409 investors representing more than $24 trillion in assets called for political leadership and policies to address climate change risks to investments. (20) Over sixty countries worldwide, including the United States, now require or encourage companies to disclose climate-related risks through corporate regulation. (21) However, many of the existing standards focus on disclosure of climate-related information, including greenhouse gas emissions and sustainability metrics, but fail to communicate this information with the accuracy, consistency, and ability to project impacts over the medium- to long-term. (22) In the United States, users of climate-related disclosures commonly cite noncomparable reporting, use of boilerplate language, and failure to report financial implications of climate-related issues as key gaps in current climate risk reporting. (23) Plus, evidence suggests that in the United States, 93% of companies face some degree of climate risk, but only 12% have disclosed it. (24) Investors need consistent, accurate information in order to make informed decisions. The current lack of consistent and accurate climate-related information severely hinders investors and raises concerns about financial stability because markets may be vulnerable to abrupt corrections. (25) The investment community both domestically and globally recognizes a need for improved disclosure; however, in the United States, climate risk reporting remains largely unregulated due to the lack of SEC enforcement and the lack of a uniform disclosure system. (26)

    The SEC's lax enforcement of its 2010 update to Regulation S-K and the demands made by the global investment community illustrate the need for a more comprehensive, uniform standard. Each year, the SEC sends thousands of "comment letters" (27) for a variety of deficiencies in filings, but over the past few years it has largely ignored climate-related risks. (28) Recently, the SEC has made efforts to increase awareness of climate risks in the form of investigating major corporations like Exxon Mobile over how it factors climate risk into pricing its projects and accounting practices, and by requesting public comments on the sufficiency of the Regulation S-K Guidance. (29) While both the investigation of Exxon and the SEC's request for comments indicate at least some heightened level of interest on the part of the agency, widespread controversy continues to grow among investors and financial institutions. (30) The proponents of more stringent disclosure standards include mostly investors and nonprofit groups who favor the establishment of accounting guidelines that quantify environmental risks due to climate change and inform investors. (31) This Comment advocates for the adoption of a uniform climate disclosure framework, exploring two of the most prominent guidelines in the United States: the Sustainability Accounting Standards Board (SASB) and the Task Force on Climate-Related Financial Disclosures (TCFD). Opponents include a number of business groups, such as the United States Chamber...

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