Investors up in arms over SEC climate proposals

SEC chairman Jay Clayton has again come under fire for failing to go far enough on climate disclosures, as the regulator pushes to give company bosses yet more control over the information they divulge to investors.

SEC commissioner Allison Lee, an experienced securities law practitioner, spoke out against Clayton and his cohorts over the proposed overhaul of rules governing how corporations disclose financial information.

Ms Lee questioned why the changes fail to include any mention of climate change disclosures, despite overwhelming demand from shareholders for this data.

While Clayton states the proposed amendments to Regulation S-K, which sets disclosure requirements for US public companies, would simplify the disclosure process for all parties and would not “adversely affect investor protection”, the change places more power in the hands of company executives, effectively allowing them to keep more from investors.

Under the changes, firms would no longer be required to provide the previous five years of selected annual financial data or the previous two years of selected quarterly financial data to the SEC.

Other amendments include scrapping the requirement to discuss off-balance sheet arrangements that are likely to have an effect on a company’s financial condition, and replacing it with a framework that encourages companies to discuss these arrangements in the context of managing the overall business.

“The improved disclosures would allow investors to make better capital allocation decisions, while reducing compliance burdens and costs without in any way adversely affecting investor protection,” Clayton said.

However, commissioner Lee attacked the proposals, noting they make no attempt to address investors’ need for standardised disclosure on climate change risk.

Ms Lee criticised the SEC for being “conspicuously silent” on climate change, adding the regulator risks falling behind international efforts and putting US companies at a competitive disadvantage globally.

“The Commission last addressed climate change disclosure in 2010. In that guidance we identified four existing items in Regulation S-K that may require disclosure related to climate change:  description of business, legal proceedings, risk factors, and management’s discussion and analysis of financial condition and results of operations, or MD&A.

“We have now proposed to modernise every one of these four items without mentioning climate change or even asking a single question about its relevance to these disclosures,” Lee said.

In 2016, the SEC requested comment on existing disclosure requirements in Regulation S-K.

According to a survey from Sustainability Accounting Standards Board, an overwhelming two-thirds of the more than 276 non-form comment letters the Commission received in response addressed sustainability-related concerns, and over 80% of those letters called for improved information in SEC filings, with only 10% opposing SEC action on this subject.

The growing number of climate change-related resolutions put forward by shareholders also highlights this demand for more transparency.

Already this year, shareholders have tabled climate change-related resolutions against big-name companies including Chevron, Exxon and Phillips 66 following concerns their lobbying activities don’t align with their public declarations to help tackle the climate crisis.

Commenting further on the proposals, Lee said she feared the changes eliminate significant disclosure items, while “laudably enhancing others” and questioned the SEC’s motive for moving towards principles-based disclosures.

“As with our last Regulation S-K proposal, these proposals heavily favour a principles-based approach rather than balancing the use of principles with line-item disclosure,” Lee stated.

“I continue to be concerned that the increased flexibility and discretion that this approach affords company executives may result in significant costs to investors – both if materiality is misapplied and through the loss of important comparability in disclosure,” Lee warned.

Last Updated: 7 February 2020