THE VALUE OF REGULATING CLIMATE DISCLOSURES.

• Author: Bremner, Cecilia

Climate change poses great physical, transitional, and legal risks to the capital market. Current U.S. Securities and Exchange Commission (SEC) disclosures do not adequately consider market exposure to such climate risk, especially in the long-term. The SEC's latest analysis of how climate-related disclosures fit into the agency's existing disclosure regulations, found in its 2010 Guidance Document, is outdated given developments in regulations, market conditions, and climate science. Moreover, SEC registrants have discretion over reporting climate-related information to the agency, and generally avoid fully disclosing such information. As capital market participants become increasingly aware of climate risks, however, they are increasingly asking SEC registrants to disclose climate-related information and the SEC to provide greater guidance and specific SEC regulation on climate matters. The SEC's recent March 2022 Proposed Rule suggests the SEC will soon take action to reduce registrants' discretion over climate-related disclosures by creating a specific duty for publicly held companies to disclose climate-related matters aligned with broadly accepted climate disclosure frameworks. This will give the SEC power to enforce climate-related disclosures and will provide market participants with more consistent, comparable, and reliable climate-related information to help them make informed investment and business decisions. This Note argues that the SEC is the appropriate agency to take such action. It suggests that either the SEC already has the implied authority to promulgate such disclosure rules, or Congress may soon give it this authority explicitly. This Note argues that the SEC should both update its 2010 Guidance Document and should adopt a final version of its March 2022 Proposed Rule. Ultimately, the SEC has a responsibility, or at least the opportunity, to help address the systemic and catastrophic risks of climate change to the capital market. The SEC should act accordingly.

1. INTRODUCTION 108 II. LEGAL CONTEXT 114 A. Protecting the Long-Term Integrity of the Capital Market Amid Climate Threats 115 B. Materiality and Its Importance Regarding SEC Climate-Related Disclosures 121 III. LEGAL ARGUMENTS & ANALYSIS 124 A. The SEC is the Appropriate Agency to Regulate Climate-Related Disclosures 125 1. The SEC's Ability to Promulgate Long-Lasting Climate-Related Disclosure Rules 125 2. The SEC's Authority to Provide Climate-Related Disclosure Guidance and to Mandate Climate-Related Disclosures 128 B. Updating SEC Climate Disclosure Guidance and Adopting a Related Rule 133 1. The Minimum: Updating the 2010 Guidance Document 134 2. Adopting a Climate-Related Disclosure Rule that Creates a Specific Duty to Disclose Climate Information Aligned with Broadly Accepted Climate Disclosure Frameworks 139 IV. CONCLUSION 144 I. INTRODUCTION

   Climate change poses great physical, transitional, and legal risks to the capital market. (1) Current U.S. Securities and Exchange Commission (SEC) disclosure regulations for publicly held companies do not adequately consider this climate risk to the capital market, especially in the long-term. Capital market participants are increasingly requesting SEC registrants to disclose climate-related information as they become more aware of climate risks. (2) Capital market participants are also increasingly requesting that the SEC update its disclosure guidance and regulations related to climate matters. (3) These requests, combined with the limited enforcement power of the SEC indicate that existing climate-related disclosures are inadequate to produce the effective climate-related disclosures that the capital market needs. (4)

   Currently, registrants have great discretion over their level of climate-related reporting to the SEC. (5) Such discretion is proving ineffective at producing climate-related disclosures that are decision-useful for market participants. Registrants are using this discretion to publicly report climate-related information through various, unregulated voluntary reporting mechanisms rather than through regulated SEC processes. (6) Voluntary reporting mechanisms tend to provide more guidance than the SEC and other U.S. regulatory bodies on how to disclose climate-related matters. (7) Reporting through voluntary mechanisms may also protect registrants from exposure to potential liability that may arise if they disclosed through SEC filings instead/Additionally, although the market seems to consider climate issues material matters, there is no SEC duty to disclose climate-related information. (9) No duty gives registrants discretion over their reporting, (10) meaning that the SEC has limited power to enforce its disclosure requirements upon reported climate information. (11) SEC enforcement is thus largely restricted to issuing comment letters. (12) Comment letters have minimal impact because they do not subject the recipient to any significant SEC penalties other than the time it takes to respond and complete the review process. (13) Registrants thus have little incentive to disclose climate-related information to the SEC. This lack of incentive unfortunately causes registrants to report climate-related information through a variety of voluntary climate reporting frameworks that are not sufficiently comprehensive to provide market participants with decision-useful information. (14)

   The multitude of voluntary climate reporting methodologies, with varying yet overlapping focuses, (15) has created inconsistencies and gaps within and between climate reporting mechanisms. (16) The voluntary nature of these reporting mechanisms has resulted in a lack of appropriate oversight of climate reporting. (17) Poor oversight has created risk of greenwashing, whereby companies overstate or make unsubstantiated climate-related claims. (18) Such claims indicate companies are allocating resources to prepare numerous climate reports that are not necessarily decision-useful for investors. Since climate-related data and assertions are not transparent, reliable, or comparable, (19) the numerous available climate reporting mechanisms are thus inadequate to ensure consistent, comparable, and reliable reporting of climate-related information.

   Market participants have additional concerns. Management is concerned about their potential personal liability for improper climate-related disclosures. (20) Investors are concerned that they are not properly informed about the ever-evolving climate change risks to the public businesses in which they are investing.- (1) To address management's concerns over their potential liability and investors' concerns over the lack of decision-useful information, capital market participants want the SEC to evolve its guidance and rules to better regulate climate-related information. (22) The hope is that this will help market participants make more informed investment and business decisions. (23) Participants want the SEC to at least provide improved guidance on how publicly held companies should consider climate-related information within the bounds of existing SEC disclosure requirements. (24) The SEC released an interpretive guidance document in 2010, titled Commission Guidance Regarding Disclosure Related to Climate Change (2010 Guidance Document or Guidance), on how the agency's existing rules may implicate climate-related disclosures. (25) The Guidance is now outdated and does not reflect current regulations, market studies, or climate science. (26) The Guidance should be updated for a few reasons: (1) to signal to the market that climate reporting is becoming increasingly material; (27) (2) to help improve consistency, comparability, and reliability within climate reporting and across other business reporting; (28) and (3) to develop participants' understanding of climate risks in the context of existing reporting structures. (29) The Guidance, though, does not create a specific duty to disclose climate-related information since it is an interpretive release. (30) Therefore, the Guidance merely provides the SEC's interpretation of federal securities laws and SEC regulations. (31) Updating the Guidance will not oblige registrants to report or subject registrants to SEC enforcement for disclosure violations, thus updating the Guidance will likely have limited overall effect.

   Some participants want the SEC to go even further than simply updating its climate-related disclosure guidance and specifically regulate such disclosures. (32) On March 21, 2022, the SEC proposed a new rule (March 2022 Proposed Rule or Proposed Rule) "that would require registrants to provide certain climate-related information in their registration statements and annual reports." (33) Adopting a final version of such a rule will create a specific duty to disclose climate-related information. (34) A specific climate-related disclosure rule will help market participants make climate-informed investment and business decisions by improving climate report consistency, comparability, and reliability. (35) Creating a specific duty to disclose by requiring specific SEC climate-related disclosures will also provide the SEC with the power to enforce its disclosure regulations for climate-related matters. Market participants' desire for more guidance and structure surrounding climate reporting--as well as the SEC's own enforcement limitations from the lack of any specific duty to disclose climate-related information--suggest that existing climate-related disclosures do not effectively support capital market needs. (36)

   This Note addresses the SEC and its role in regulating climate-related disclosures. Part II provides the relevant legal context. It focuses on why the SEC was established and how climate change threatens the SEC's purpose to provide long-term integrity for the capital market. It also explains the notion of materiality and introduces how it relates to climate change. Part III...