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1 [1] (September 10, 2019)

handle is hein.crs/govbazn0001 and id is 1 raw text is: Congressional Research Service Intorrn~ng the legislative debate since 1914 0 September 10, 2019 Climate-Related Risk Disclosure Under U.S. Securities Laws In light of public concern over climate change, some stakeholders have asked to what extent publicly traded companies should disclose their climate-related risks. The Securities and Exchange Commission (SEC) requires publicly traded companies to disclose financial statements and certain other relevant business information in public filings, including annual and quarterly reports. While current SEC requirements do not address climate-related risks expressly, publicly traded companies must disclose such risks if they are material under federal securities laws. Financial Risks Posed by Climate Change Numerous organizations, shareholder groups, businesses, and financial regulators have recognized financial risks that climate change may pose to companies. Such climate- related risks commonly fall into two general categories: * Physical risks: These risks include direct and indirect risks arising from extreme weather events and from longer-term shifts in climate patterns, including, for example, changes in water availability and food security. Physical risks have important implications for many companies' physical facilities, operations, transportation costs, supply chains, and employees. * Transition risks: These risks arise from policy, legal, technology, and market changes as the world transitions to a lower-carbon economy, with potential financial or reputational effects on businesses. For example, a company may engage in efforts to reduce greenhouse gas emissions or otherwise respond to changing consumer behavior. Although financial regulators have not traditionally focused on climate change, some financial regulators have begun to consider the economic impact of climate-related changes. For example, the Bank of England is incorporating climate change scenarios into certain prudential regulation stress testing processes. Similarly, the Bank of Canada recently added climate change to its list of the top economic risks facing the country's financial system, as noted in its 2019 Financial System Review. In the United States, Federal Reserve Chairman Jerome Powell has stated that climate events have the potential to inflict serious damage on the lives of individuals and families, devastate local economies, and even temporarily affect national economic output and employment. What Climate-Related Risk Disclosures Do the SEC Currently Require? Federal securities law does not explicitly require publicly traded companies to disclose specific climate-related risks. Rather, publicly traded companies need to disclose climate- related risks if such risks are material to investors. In Basic, Inc. v. Levinson, 485 U.S. 224 (1988), the Supreme Court explained that a fact is material if there is a substantial likelihood that a reasonable shareholder would find its omission to alter the total mix of available information significantly. By requiring publicly traded companies to disclose material information, federal securities law enables shareholders to make informed investment decisions. Subject to this principles-based approach to disclosure, a company's management must use its judgment in complying with the materiality standard to determine what information must be disclosed. Under the securities laws, investors harmed by materially misleading statements or the omission of material facts can seek remedies through civil litigation. The SEC's Regulation S-X and Regulation S-K require publicly traded companies to disclose certain information, such as financial statements and business descriptions, in their periodic filings. For example, in the Management's Discussion and Analysis, or MD&A section of SEC- mandated public reports, publicly traded companies must provide a narrative explanation of their financial statements. The MD&A section also requires disclosure of any known trends, events, or uncertainties, which are reasonably likely to have a material effect on the publicly traded company's financial condition or operating performance beyond what its reported financial statements reflect. In the Risk Factors section of SEC-mandated periodic reports, a company must disclose the most significant risk factors that would make an investment in the company speculative or risky, although the rule states that companies should not present risks that could apply generically to any security. Moreover, the SEC's Rule 12b-20 requires additional disclosure of such further material information, if any, as may be necessary to make the required statements, in light of the circumstances under which they are made, not misleading. In 2010, the SEC issued a Commission Guidance Regarding Disclosure Related to Climate Change to assist publicly traded companies in satisfying their disclosure obligations with respect to climate change matters. First, the SEC's guidance reviewed certain explicit disclosure requirements concerning environmental matters contained within Regulation S-K. Specifically, under Item 101 of the regulation, issuers must report their material costs of complying with environmental laws. Under Item 103, companies generally must disclose environmental litigation that is material, involves damages in excess of 10% of the company's assets, or involves a government entity. Next, the SEC provided examples of climate-related risks that a publicly traded company would need to report (including in the business description, MD&A, or risk factors sections), if they are material: https://crsreports.congress.gc