Analysis: Why Biden’s securities regulator faces climate crackdown challenges

Analysis: Why Biden’s securities regulator faces climate crackdown challenges

News: Analysis: Why Biden’s securities regulator faces climate crackdown challenges.

WASHINGTON / BOSTON (Reuters) – With Democrats at the helm, the U.S. Securities and Exchange Commission is committed to cracking down on companies and funds that mislead investors about the risks of climate change, but that’s perhaps easier said than done, more than a dozen lawyers and former alumni Agency officials say.

The Securities and Exchange Commission (SEC) has set up a task force to oversee public companies that fail to disclose material business risks due to climate change, such as: B. the potential depreciation of fossil fuels or disruptions in the supply chain due to floods or forest fires.

The 22-strong team housed in the enforcement department will also review investment advisors and funds promoting sustainable products for so-called “greenwashing” and other compliance issues, the agency said.

The initiative is part of a broader effort by President Joe Biden’s administration to address and plan for climate change. Morningstar said investors need better information as a record $ 51 billion poured into sustainable U.S. funds in 2020 alone.

“The Commission is responding to growing investor concerns about materially misleading statements and omissions regarding corporate climate-related risks and activities,” said Kelly Gibson, assistant deputy enforcement director who leads the task force.

While prosecuting fraudulent or sloppy disclosures is at the heart of the SEC’s activities, the new initiative is leading the agency into uncharted territory, the lawyers said.

According to a Reuters review, the SEC has rarely taken enforcement action for climate-related disclosure misconduct.

In 2018, the company completed a high-profile investigation into how ExxonMobil is accommodating the impact of climate change on its assets without taking any action.

While the European regulators require large companies to disclose environmental risks and metrics and to introduce sustainability disclosures for investment products, there are no formal climate-specific disclosure rules in the US.

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There were also no definitions of key terms such as “sustainable” agreed and no generally used standards for measuring corporate environmental goals or for quantifying and reporting climate risks.

“The SEC wants to make sure that consumers really get what they are advertised for,” said Sarah Bratton Hughes, director of sustainability at Schroders in North America. “What makes this so difficult is the lack of standardization.”

DISCLOSURE

In the 2010 guidance, the SEC gave companies some examples of climate change-related developments that they should consider “material” and that must therefore be disclosed under securities laws.

By 2020, 60% of Russell 3000 companies mentioned climate risk in submissions, up from 35% in 2009, according to a review by the Brookings Institution. Those claims tended to focus on falling fossil fuel consumption while glossing over issues like rising sea levels, fires or heat waves, the study said.

Such loopholes, in and of themselves, are difficult for the SEC to track because the 2010 guidance is broad, out of date, and holds weak legal status as opposed to a formal rule, attorneys said.

The law also gives businesses the freedom to make good faith forecasts that, given the long time horizon and complexity of climate science, could be difficult to refute.

“You would have to demonstrate that a disclosure is materially misleading – and deliberately, or at least recklessly, misleading. That’s a pretty heavy burden, ”said Mark Schonfeld, a former SEC director who is now a partner at Gibson, Dunn & Crutcher.

However, one person familiar with the regulatory discussions said the SEC could raise fraud allegations if companies suppress internal climate risk data, much like it does when it comes to disclosing cyber breaches. In 2018, for example, Altaba, formerly known as Yahoo !, paid $ 35 million to clarify allegations by the SEC that vague information had misled investors about a data breach.

“Investigating disclosures is one of the most fundamental tasks of the SEC, and environmental, social and governance (ESG) is no different from any other topic in this regard,” said Gibson of the SEC.

Just as companies may underestimate climate change risks to protect their stock prices, investment product providers can overdo their environmental credentials to attract cash.

The California-based activist group As You Sow, for example, has rated 20 US funds with sustainability mandates that are involved in fossil fuel companies as “failing”.

However, proving that funds mislead investors about their investment strategies could be difficult without a standard definition of “sustainability” and related terms.

For example, an oil company that spends a lot of money on renewable energy could arguably be a sustainable investment, said Ian Roffman, a former SEC attorney who now leads the securities enforcement practice at Boston law firm Nutter McClennen & Fish.

Fund marketing materials are also created in a broad language with flexible investment parameters to keep them safe from litigation, according to lawyers.

They believe the SEC, which began soliciting industry feedback this week to standardize its climate change claims, will ultimately tighten its rules to address these challenges. But that could take some time.

“There’s a lot of gray area,” said Roffman.

Adaptation by Michelle Price and Sonya Hepinstall

Original Source © Reuters

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