Climate Change and Sustainability Financial Reporting (CCSFR) is a complex, swiftly evolving, and now crucial area for issuers and capital providers globally. It has arrived front-and-center in global capital markets with the entrance of G20/Financial Stability Board (FSB) oversight. The Trump Administration’s resolute efforts to retract, revoke, or otherwise invalidate the climate protection progress made by the Obama Administration, as well as Trump Executive Orders aimed at scaling back financial regulation, will not diminish or derail the global tidal wave of investor demand for “full and fair” CCSFR, nor will Trump Administration actions alter or impede the seismic shift of global governmental support for this disclosure.
President Trump views environmental and financial deregulation as main tools to stimulate economic growth and job creation. The EOs issued to date have focused upon Environmental Protection Agency (EPA) rules and the repeal or revision of the Dodd-Frank Act. CCSFR is governed by securities laws worldwide, and in the U.S., Securities & Exchange Commission (SEC) regulation, which implements and enforces the U.S. securities laws, is the controlling authority. CCSFR is not legally impacted by EPA rules or the Dodd-Frank Act. The SEC has not yet issued any final or proposed rules on CCSFR, but the “materiality” principle inherent throughout the SEC regime applies to all issuer SEC filings. The SEC issued an “Interpretative Release” on Climate Change Guidance in 2010, which identified four main areas of climate-related risk that issuers should consider, but this release does not have the force of law.
Neither President Trump nor his Cabinet or agency officials have mentioned CCSFR, even in the context of the 2015 Paris Climate Agreement, and the substantive linkage between CCSFR and economic growth/job creation is attenuated at best. The new SEC Chair appointee, Jay Clayton (Senate confirmation pending), in his March 2017 nomination hearing testimony to the Senate Committee on Banking, Housing and Urban Affairs, supported the 2010 SEC Climate Change Guidance in response to a direct query from Senator Jack Reed: “public companies should be very mindful of that guidance as they are crafting their disclosure.” The SEC Chair has a dominant influence on SEC rulemaking and enforcement policies, and will be appointing a new Corporate Finance Division chief and a new Enforcement Division chief after Senate confirmation. However, the entire five-member Commission must vote on new rules and regulations, currently comprised of Kara Stein (Democrat), Michael Piwowar (Republican, current Acting Chair), and three vacancies to be filled by President Trump appointees (SEC Chair and two Commissioners), who will be expected to consider President Trump’s political philosophy. Thus, it is prudent to consider the potential relevance of certain Trump EOs.
It is noted that EOs have certain legal restrictions: (i) EOs which are not issued under specific statutory authority from Congress can be legally challenged as overstepping Presidential authority or the spirit of the Constitution; (ii) EOs do not directly compel the SEC to act because it is an independent regulatory agency; and (iii) the Administrative Procedure Act (5 U.S.C. Subchapter II) (APA) applies, and has stringent agency notice and comment requirements for amending or rescinding existing rules or adopting new rules.
Executive Order on Reducing Regulation and Controlling Regulatory Costs, January 30, 2017: This EO, known as the “two-for-one” EO, requires that two regulations must be repealed for each new one issued, and seeks to reduce the regulatory burden. This EO is supported by three House bills, each addressing different aspects of the regulatory process: H.R. 998—searching for and Cutting Regulations that are Unnecessarily Burdensome (SCRUB) Act; H.R. 1004—Regulatory Integrity Act of 2017; and H.R. 1009—OIRA Insight, Reform, and Accountability. These House bills, if passed by both the House and the Senate and signed into law, could restrict SEC action on new rulemaking, or encourage the SEC to seek revision or repeal of existing SEC rules (subject to the APA).
Executive Order on Financial Regulatory Reform, February 03, 2017: This EO directs the Treasury Secretary to consult with the Financial Stability Oversight Council (FSOC) (consisting of U.S. federal and state financial regulatory heads, including the SEC Chair) and report to President Trump within 120 days, identifying any laws, treaties, regulations, guidance, reporting and recordkeeping requirements, and other Government policies that inhibit Federal regulation of the U.S. financial system in a manner consistent with the “Core Principles’, which include making regulation “efficient, effective, and appropriately tailored.”
It is unclear how FSOC members should conduct this broad wholesale evaluation process, especially in the face of expected stiff agency budget cuts. The SEC likely will treat this EO and the “Core Principles” with deference, but may be reluctant to fully implement this directive, given that the SEC’s Disclosure Effectiveness Initiative is already tackling the modernization and streamlining of SEC issuer disclosure rules.
Executive Order on Enforcing the Regulatory Reform Agenda, February 24, 2017: This EO requires each federal agency to form a task force to review existing regulations and recommend whether to repeal or simplify those deemed to harm the economy and job creation. It is unclear whether this task force regulatory evaluation is meant to include the “Core Principles” evaluation directive of the February 3rd EO (described above), or meant to be an entirely separate review. Again, this massive regulatory review process will require scarce agency time and resources, and the SEC may be disinclined to carry out this directive, given that the SEC’s mandate is not to protect the economy and job creation, but to protect investors and capital markets (both of which are served by “full and fair” CCSFR).
Executive Order on Promoting Energy Independence and Economic Growth, March 28, 2017: This EO directs federal agencies to take steps to rescind or significantly revise existing climate regulations in the interests of “promoting energy independence” and “economic growth.” Its implementation is subject to varying agency interpretations, is legally restricted by APA requirements, and has already provoked vehement protest from various U.S. stakeholder constituencies as well as Congressional backlash. U.S. Senators Jack Reed and Sheldon Whitehouse, and more than 30 Democratic Senator co-sponsors, immediately introduced legislation to rescind this EO, entitled The Clean Air, Healthy Kids Act which would block federal agencies from implementing it. CCSFR arguably has no rational relevance to economic growth and job creation and thus it would seem that this EO technically should not apply to CCSFR, especially considering that issuer “full and fair disclosure” of climate change and sustainability risks clearly reduces investor and capital market financial risks and thus can promote economic growth. Given the strong global investor demand for proper issuer CCSFR disclosure in SEC filings, it would be injudicious for the SEC to respond by putting CCSFR on the back burner or by failing to take into consideration the preponderance of public comment letters on the SEC’s 2016 Concept Release which expressed a clear preference for mandatory CCSFR disclosure.
There is a clear and compelling business case for SEC mandatory issuer CCSFR and for rigorous SEC enforcement in this area, consisting of five principal global market and regulatory forces (space limitations preclude detailed discussion of these factors):
Inescapable Transition to Low-Carbon, Clean Tech Economy: Implementation of the 2015 Paris Climate Agreement, to which G20 Finance Ministers remain firmly committed, will cause a profound and fundamental adjustment of the global economy over the next 20 years. See, e.g., June 2016 policy paper by two prominent climate scientists; Speeches by Governor Mark Carney, Breaking the Tragedy of the Horizon – Climate Change and Financial Stability (Sept. 2015) and Resolving the Climate Paradox (Sept. 2016).
Irrefutable Global Investor Demand for Full and Fair CCSFR Disclosure: Investors want mandatory, comprehensive, consistent, and comparable CCSFR, and nothing less. See, e.g., CERES, Investors Have Their Say on Sustainability & Stock Exchanges: Feedback on the WFE ESG Guidance and Recommendations, March 2017; and SEC public comment letters on the Concept Release.
Issuer SEC Disclosure Deficiencies Harm U.S. and Global Financial Markets: Lax enforcement by the SEC on climate-related disclosure has led to investigations by the New York Attorney General and the California Attorney General against several energy companies, including, most recently, Exxon in November 2015, for alleged inadequate climate risk disclosure under U.S. securities laws causing harm to the investing public.
Securities Regulators and Stock Exchanges Worldwide Are on Board: There are now over 40 OECD and emerging market countries that mandate sustainability disclosure, and 55 stock exchanges have joined the Sustainable Stock Exchange Initiative.
G20/FSB Supervision: This global macroprudential leadership involvement signals a critical, highly consequential, global power shift from the voluntary sustainability reporting sphere to a financial regulatory-dominated sustainability reporting world, and sets in motion a de facto directive compelling national securities regulators worldwide to issue a definitive position on climate-related reporting, including enforcement.
It is undeniable that escalating climate change and an increasingly resource-constrained world are creating serious financial system systemic risks and have made CCSFR critical to investment and lending decisions, as acknowledged by the G20/FSB. As well, “full and fair” CCSFR is now an essential risk mitigation tool for issuers. Its inherent transparency and accountability, as well as the checks, balances, and safeguards inherent in SEC reporting, force companies to implement the systematic, rigorous policies and processes upon which proper strategic and operational management of these issues depend.
The only question for the SEC to decide is what specific CCSFR disclosure regime best protects investors and markets, which was the inquiry posed in the April 2016 SEC Concept Release, and whether this disclosure should be mandated by issuing a new proposed rule, or solely by application of the materiality principle, ideally with issuance of additional SEC interpretative guidance. This CCSFR disclosure then should be designated an enforcement focus for the SEC’s Enforcement Division Financial Reporting and Audit Task Force, given current widespread (and documented) issuer filing deficiencies in this area.
Governor Mark Carney, in an April 2017 speech entitled The High Road To A Responsible, Open Financial System, stated that “financial market leaders must fulfill their responsibility in establishing a responsible, open financial system,” and that this requires international regulatory cooperation “for establishing common minimum standards and consistent implementation which deliver similar outcomes … Such an approach would allow capital to move more freely, efficiently and sustainably between jurisdictions …. robust standards consistently applied [would support] greater trade, investment and innovation. This high road leads to more jobs, higher sustainable growth, and better risk management across the G20.”
This is cogent advice that speaks directly to the Trump Administration agenda, and countenances only one course of action—for the U.S. to remain a signatory to, and timely implement, the 2015 Paris Climate Agreement, and for the SEC to mandate and properly enforce “full and fair disclosure” of climate-related and sustainability risks. Any Trump Administration or SEC action to discourage or delay CCSFR is ill-advised, as it will only serve to complicate issuers” CCSFR compliance, increase investor and capital market systemic risk, and erode global market perception of U.S. financial system stability and historical SEC investor protection leadership.