Climate-Related Risks: SEC Has Taken Steps to Clarify Disclosure Requirements
Released: 2018-03-22T00:00:00

Letter

Background

Overview of SEC

SEC’s mission is to protect investors; maintain fair, orderly, and efficient markets; and facilitate capital formation. As part of SEC’s strategic plan, SEC strives to promote a securities market that is worthy of the public’s trust and is characterized by, among other things, transparent disclosure to investors of the risks of particular investments.

SEC is headed by a five-member Commission composed of the Chair and four Commissioners. SEC’s responsibilities are divided among five divisions and 24 offices, including the following offices that are responsible for filing review or investor outreach:

Corporation Finance is responsible for reviewing documents that publicly-held companies are required to file with SEC, which may include climate-related disclosures. Corporation Finance reviews disclosure documents that companies are required to file, including annual reports. Corporation Finance performs its filing review responsibilities through accounting and legal staff in 11 offices, organized by industry. The division’s staff also provides companies with assistance interpreting the Commission’s rules and assists the Commission with rule making.

The Investor Advisory Committee was established under the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd- Frank Act) to advise the Commission on regulatory priorities, the effectiveness of disclosure, and initiatives to protect investor interests and to promote investor confidence, among other things. The committee has the authority to submit findings and recommendations for review and consideration by the Commission.

The Office of the Investor Advocate was established in 2014 pursuant to the Dodd-Frank Act to provide a voice for investors, assist retail investors, study investor behavior, and support the Investor Advisory Committee. The Investor Advocate is required to submit reports directly to Congress, without any prior review or comment from the Commissioners or SEC staff.

SEC Disclosure Requirements, Rule Making, and Guidance

SEC rules generally require public companies to disclose, among other things, known trends, events, and uncertainties that are reasonably likely to have a material effect on the company’s financial condition or operating performance through annual and other periodic filings. Information is material if there is a substantial likelihood that a reasonable investor would consider it important in making an investment decision. Regulation S-K, promulgated by SEC, contains disclosure requirements that are applicable to the nonfinancial statement portion of annual filings and other periodic reports filed with SEC.

The Commission occasionally provides guidance on topics of general interest to the business and investment communities by issuing interpretive releases, which publish the Commission’s views and interpret federal securities laws and SEC regulations. The 2010 Guidance was published by the Commission to provide guidance to companies on how existing disclosure requirements apply for climate-related matters.

The 2010 Guidance identifies four items in Regulation S-K that may be most likely to require climate-related disclosure in companies’ annual filings. The four items are as follows:

Description of business. This section of a company’s annual filing requires a description of the company’s business, including its main products and services, and what markets it operates in. This item expressly requires disclosure of certain material effects of complying with environmental laws.

Legal proceedings. This section requires a company to include information about certain material pending legal proceedings, including, in certain circumstances, those arising under any federal, state, or local provisions that have been enacted or adopted regulating the discharge of materials into the environment or primarily for the purpose of protecting the environment.

Risk factors. This section discusses the most significant factors that make investment in the company speculative or risky. Disclosure under this section should clearly state risks and specify how each risk affects the particular company and should not present risks that could apply to any company.

Management’s discussion and analysis. This section presents management’s perspective on material past and anticipated future business results. The information provided in this section is intended to give the investor an opportunity to look at the company through the eyes of management by providing both a short- and long-term analysis of the company’s financial condition. Additionally, in this section companies must identify and disclose known trends, events, demands, commitments, and uncertainties that are reasonably likely to have a material effect on their financial condition or operating performance.

The 2010 Guidance also identifies four different topics under which climate-related risks can be categorized (see table 1). Regardless of whether a company’s identified risk falls under one of these categories, companies need to disclose the information required by the federal securities laws and regulations, and any additional material information necessary to make the required statements, in light of the circumstances under which they are made, not misleading.

Additionally, SEC staff may issue guidance that includes a summary or explanation of rules adopted or amended by the Commission. For example, SEC staff issued a Staff Accounting Bulletin on materiality that provides guidance in applying quantitative materiality thresholds to the preparation of financial statements filed with SEC. According to SEC, staff guidance is not a substitute for any rule, and only the rule itself can provide complete and definitive information on its requirements.

The Commission can adopt new rules through the rule-making process. According to SEC, rule making can involve several steps: concept release, rule proposal, and rule adoption.

Concept release. The Commission at times issues a concept release to seek public input to help identify the appropriate regulatory approach, if any, prior to issuing a rule proposal. In a concept release, SEC describes the area of interest and the Commission’s concerns; identifies different approaches to address the problem; and includes a series of questions that seek the views of the public on the issue.

Rule proposal. The Commission publishes a detailed formal rule proposal for public comment. A rule proposal advances specific objectives and methods for achieving them. The Commission typically provides between 30 and 90 days for public review and comment. Public comment is considered vital to the formulation of a final rule.

Rule adoption. The Commissioners consider what they have learned from public input on the rule proposal and seek to agree on the specifics of a final rule. If a final rule is adopted by the Commission, it becomes part of the official rules that govern the securities industry.

SEC’s Annual Filing and Disclosure Review Process

According to SEC senior staff, SEC reviewers examine climate-related disclosures as part of their review of all disclosures included in the companies’ annual filings. Corporation Finance selects annual filings for review and determines the extent to which annual filings are reviewed based on the requirements of the Sarbanes-Oxley Act of 2002 and review goals established by senior leadership (see fig. 1). The Sarbanes-Oxley Act requires SEC to review the financial statements of each reporting company at least once every 3 years. According to SEC senior staff, SEC staff review the financial statements of a significant number of companies more frequently. SEC staff may also review companies’ nonfinancial disclosures, which may be reviewed as (a) a part of a full cover-to-cover review or (b) a targeted issue review. SEC reviewed the disclosures of approximately 4,400 companies each in fiscal years 2015 and 2016 and approximately 4,200 companies in fiscal year 2017. Of the reviews in fiscal years 2016 and 2017, over 1,400 and 1,250 resulted in comment letters, respectively.

Corporation Finance generally conducts two levels of review at key steps in the filing review process. Once selected for review, a filing enters the review cycle, which generally includes evaluating the disclosure for material compliance with securities laws, preparation and review of comments, review of company responses to comments, and public posting of filing review correspondence on the SEC website. For most filings, a second-level review is required during each of these phases.

According to some SEC staff, as part of SEC’s filing reviews, SEC staff focus on the company’s filing for the current year and can supplement the review with information from the company’s prior years’ filings, filings of other companies in the same industry, SEC’s prior filing review reports, and other external data outside of the filings, including companies’ sustainability and earning reports and financial analyst reports. Companies may voluntarily disclose climate-related risks through channels outside of SEC filings, including nongovernmental organizations, company websites, and in response to reporting requirements in foreign countries.

As part of the review process, SEC staff may issue “comment letters” to companies to obtain additional information, clarification on the companies’ disclosures, or elicit better compliance with applicable requirements. In a review of Corporation Finance’s comment letter process, SEC’s OIG reported in September 2017 that Corporation Finance has established policies, procedures, and internal controls that provide overall guidance for how staff should conduct disclosure reviews and for how information, including comments, should be documented, tracked, and disseminated to companies and the public. However, the report also found, among other things, that SEC reviewers (1) did not always properly document comments before issuing comment letters to companies and (2) inconsistently documented oral comments to companies. The report recommended that Corporation Finance establish mechanisms or controls and provide detailed guidance to staff to improve documentation in the comment letter process. SEC management agreed with these recommendations.

Furthermore, if SEC reviewers find a material inadequacy in a company’s disclosures, the reviewers may refer the potential violations to the Division of Enforcement for investigation. If the Division of Enforcement finds sufficient evidence of a potential violation, SEC may file an action in federal district court or institute an administrative proceeding.

Corporation Finance maintains four distinct electronic databases to track, document, and report on different aspects of its filing review program. One of these is Electronic Data Gathering, Analysis, and Retrieval (EDGAR), which is Corporation Finance’s primary record-keeping system of documents related to filing reviews, including companies’ filings, SEC’s comment letters to companies and their responses to the letters, and SEC staff’s filing review reports.

Developments Associated with Climate-Related Disclosures since the 2010 Guidance

In April 2016, SEC published a Concept Release to seek public comment on modernizing certain business and financial disclosure requirements in Regulation S-K. The 2016 Concept Release specifically requested comments about “Disclosure of Information Relating to Public Policy and Sustainability Matters.” Sustainability disclosures—including topics on climate change, resource scarcity, corporate social responsibility, and good corporate citizenship—are often characterized broadly as environmental, social, or governance concerns. The public comment period for the Concept Release ended on July 21, 2016. According to SEC staff, the agency received approximately 370 unique comment letters on the Concept Release.

Since 2010, several voluntary reporting frameworks are available for companies to use to report climate-related information, including the following: In June 2017, the FSB Task Force issued final recommendations for four areas of voluntary climate-related disclosures that companies can choose to adopt, which are applicable to organizations across sectors and jurisdictions.

In October 2016, the Sustainability Accounting Standards Board (SASB) developed a Climate Risk Framework that enables, among other things, the identification of climate-related risks and the development of metrics that help companies disclose material sustainability information to investors.

In May 2013, the Global Reporting Initiative and CDP (formerly known as the Carbon Disclosure Project) signed a Memorandum of Understanding for the two organizations to work together to align areas of their reporting frameworks. This will provide more consistency in companies’ voluntary climate-related disclosures and improve comparability of data for investors.

SEC Issued the 2010 Guidance and Comment Letters to Specific Companies to Clarify Climate- Related Disclosure Requirements

SEC issued the 2010 Guidance, and comment letters to specific companies, to clarify their existing disclosure requirements as they apply to climate-related matters. SEC staff said the issuance of the 2010 Guidance was the primary form of communication it used to clarify to companies their climate-related disclosure requirements. However, SEC staff also noted that companies should consider the 2010 Guidance along with all other guidance and securities laws and regulations applicable to their filings. In addition to publishing the 2010 Guidance, SEC staff discussed it immediately following its release in webinars and other public events. For example, an SEC staff member presented information on the 2010 Guidance at a panel discussion for an October 2010 webinar hosted by the National Asian Pacific American Bar Association. Representatives from the industry associations with whom we spoke, which represent the five industries we selected, all agreed that the 2010 Guidance helped clarify climate-related disclosure requirements and stated that they consider the disclosure requirements for climate-related risks to be clear and have no need for additional guidance.

In addition, since the release of the 2010 Guidance, SEC staff has issued individual comment letters to specific companies on their climate-related disclosures. For example, on September 26, 2016, SEC staff issued a comment letter to an oil company requesting that the company expand on its disclosures in the risk factor section of the filing to provide a more in- depth description of its climate-related compliance obligations. SEC publishes comment letters in EDGAR, and other interested companies can view these letters to understand SEC’s assessment of a particular company’s disclosures. Ceres, a nonprofit organization that advocates for climate-related disclosure, analyzed SEC’s comment letters from February 2, 2010—the release date of the 2010 Guidance—to December 31, 2013, to determine how many were related to climate-related disclosures. Ceres reported that SEC staff sent 25 letters relating to climate-related disclosures to 23 companies (2 companies received two letters as a result of back-and-forth correspondence) out of the more than 45,000 comment letters sent during this period. Using the same specific keyword search terms—such as “climate change” and “climate mitigation”—that were identified in the Ceres report, we found 14 comment letters to 14 companies that SEC staff issued relating to climate-related disclosures out of the over 41,000 comment letters issued from January 1, 2014, through August 11, 2017. These comment letters were found during our search but may not represent all climate-related comment letters SEC staff has issued during that time frame.

SEC Examined Climate-Related Disclosures for Reports to Congress and Issued a Concept Release Seeking Public Input on Disclosure Requirements

After the issuance of the 2010 Guidance, the Senate Committee on Appropriations directed SEC to conduct two reviews of climate-related disclosures in 2012 and 2014. In response, SEC staff examined climate- related disclosures of a total of 60 companies in six industries each year in 2012 and 2014. In both reports, SEC staff focused on the business description, risk factors, and management’s discussion and analysis sections of companies’ filings and found that most of the filings included some level of climate-related disclosure in one or more of these areas. SEC staff also found that the disclosures they reviewed varied in the level of details provided. Additionally, in the 2012 report, SEC staff reported that they did not find any notable year-to-year changes in the disclosures reviewed from the year before the 2010 Guidance to the year after. According to SEC senior staff, in addition to its regular evaluation of climate-related disclosures in individual filing reviews, SEC staff continues to periodically assess climate-related disclosures within these industries.

SEC senior staff said they did not expect changes in companies’ climate- related disclosures as a result of the 2010 Guidance since SEC did not adopt any new disclosure requirements. As previously mentioned, SEC published the 2010 Guidance to provide guidance to companies on how existing disclosure requirements apply for climate-related matters. At the time the 2010 Guidance was issued, “cap and trade” legislation was pending in Congress; the Environmental Protection Agency was taking steps to regulate greenhouse gas emissions; and there were efforts to launch an international “cap and trade” system. The 2010 Guidance in part provided clarification on how such changes—if they took place— could be incorporated into companies’ filings. However, some of these changes did not occur.

Through the April 2016 Concept Release related to business and financial disclosures in Regulation S-K, SEC sought input from investors, companies, and other interested parties on the effectiveness of its disclosure requirements, including a request for comment on climate- related disclosures in SEC’s filings. In the April 2016 Concept Release, SEC discussed comments previously received that both noted a growing interest in environmental, social, or governance disclosure among investors and recommended increased sustainability disclosure requirements. According to SEC staff, some comments criticized the primarily voluntary nature of current corporate sustainability reporting outside of companies’ SEC filings. As of December 2017, SEC senior staff said they are considering recommendations for the Commission’s consideration based on comments received on the Concept Release.

SEC Faces Constraints in Reviewing Climate- Related Disclosures as It Primarily Relies on Information That Companies Determine Is Material

As SEC reviews climate-related and other disclosures in companies’ filings, SEC relies primarily on information that companies determine is material. SEC may not have details of the information companies used to support their determination of material climate-related risks. Also, this climate-related information varies in format and specificity among companies. SEC has tools, mechanisms, and resources to help ensure that its staff conducts reviews consistently across filings. Stakeholders, including investor and industry groups, have mixed views on the need for more climate-related disclosures with additional specificity and a consistent format for these disclosures to allow for comparison across filings. Additional disclosure requirements or increased scrutiny of companies’ climate-related information—which, if necessary, SEC and Congress can consider—could have mission and resource implications for SEC’s Division of Corporation Finance.

SEC May Not Have the Details of the Information Companies Rely on in Determining Materiality

SEC reviewers may not have access to the detailed information that companies use to arrive at their determination of whether risks, including climate-related risks, must be disclosed in their SEC filings. SEC’s scope of review of companies’ disclosures under federal securities laws differs from the scope of review that may be possible through the investigative authority of the state attorneys general under state laws. SEC senior staff further noted that Corporation Finance staff assess companies’ filings for compliance with the disclosure requirements under federal securities laws but do not have the authority to subpoena companies’ information. As previously noted, if SEC reviewers find a material inadequacy in a company’s disclosures, the reviewers can refer potential violations to the Division of Enforcement for investigation. SEC senior staff stated that the Division of Enforcement can subpoena company information only after obtaining a formal order of investigation.

In an investigation of Peabody Energy under a New York State law, the Attorney General of New York State subpoenaed the company’s internal documents and found that although the company’s disclosures denied it had the ability to reasonably predict the impact of future climate change laws and regulations on its business, Peabody had made internal market projections showing severe negative impacts from certain potential laws and regulations and failed to disclose those projections to the public. As a result of this investigation, Peabody agreed to disclose, among other things, concerns that the environmental impacts of coal combustion are resulting in increased regulation, which could affect demand for Peabody’s products or services. SEC staff explained that when they become aware of an investigation of a company, they look for and assess disclosures related to any pending legal proceedings and the potential impacts. SEC senior staff told us SEC staff reviewed Peabody Energy’s filings and other publicly available information, including its climate- related disclosures, and did not issue climate-related comments in its review of Peabody Energy’s filings; SEC has not taken any public actions against Peabody Energy following the New York Attorney General’s investigation. Also, SEC staff noted that the additional disclosures Peabody Energy is asked to provide by the New York Attorney General may not be applicable for other companies, but these disclosures may be required if the information is material and necessary to make the disclosures not misleading under the current federal disclosure rules.

If SEC reviewers are aware of publicly-available information outside of the filings that is contradictory to companies’ disclosures, they can request additional information or clarification from companies on their climate- related and other disclosures through comment letters. However, a company possesses information necessary to determine whether environmental regulations will have a material effect on the company’s financial condition or results of operations and may claim that the effect of environmental regulations raised by SEC is not material and hence does not need further disclosure. For example, in a 2016 comment letter, SEC staff requested that an oil company expand and clarify its discussion of climate-related compliance with a California environmental law. The company responded that the current costs and impact of compliance with the state law have not been material to the company and it would seek to more clearly disclose such information in its annual filing for the coming year. SEC staff did not issue any further comment on this issue. SEC senior staff told us that they determine whether further comments are needed based on whether the company’s response is consistent with other information the companies reported in other publicly available documents, such as financial analyst reports or the company’s sustainability report.

Climate-Related Disclosures Vary in Format and Specificity

Climate-related disclosures vary in format because companies may report similar climate-related disclosures in different sections of the annual filings. We reviewed and identified illustrative examples of climate-related disclosures in the annual filings of 116 S&P 500 Index companies, filed with SEC in 2016, in the five industries in our review (see app. II for additional information). We found, for example, one beverage company reported its goal to reduce greenhouse gas emissions in the business description section of its filing while another beverage company reported a similar goal on carbon footprint reduction in the risk factors section of its filing. As previously noted, SEC reviewers may compare a company’s disclosures to other companies’ disclosures in the same industry to identify potential missing disclosures if other companies in the same industry have made similar disclosures. When companies report climate- related disclosures in varying format, SEC reviewers and investors may find it difficult to navigate through the filings to identify, compare, and analyze the climate-related disclosures across filings, especially given the size of each individual filing. In addition, companies’ filings may include only a few mentions of climate-related disclosures. For instance, the annual filings we reviewed for an insurance company, an oil company, and a food company, respectively, were 389 pages, 117 pages, and 136 pages long. Within these filings, the corresponding number of mentions of climate-related disclosures was 9, 13, and 6, respectively, based on our analysis using Ceres’ SEC Sustainability Disclosure Search Tool. Given that SEC reviewers primarily rely on information companies disclose in filings, it may be difficult to determine whether a low level of disclosure indicates that the company does not face any climate-related risks or does not consider the risks to be material.

Also, climate-related disclosures in some companies’ filings use boilerplate language, which is not specific to the company, and the information is unquantified. Our review of the annual filings of 116 S&P 500 Index companies found that some companies’ climate-related disclosures provided some quantitative information, while some other companies’ disclosures listed existing environmental regulations without specifying the associated impacts on the companies. For example, one oil and gas company stated in its annual filing that the imposition and enforcement of stringent greenhouse gas emissions reduction targets could severely and adversely impact the oil and gas industry and significantly reduce the value of the company’s business. However, the company did not provide any quantitative information on such impacts on its business. Additionally, SASB reported in October 2016 that its analysis of almost 1,500 disclosures in annual filings of 637 companies in 72 industries found that almost 30 percent of the disclosures SASB reviewed did not include any climate-related information, some contained boilerplate language or company-tailored narratives, and less than 20 percent of these disclosures included quantitative metrics.

SEC Has Mechanisms, Tools, and Resources to Help Its Staff Consistently Review Filing Disclosures

Although SEC relies primarily on information companies provide in their filings when reviewing climate-related and other disclosures, it has mechanisms, tools, and resources to help its staff consistently review filing disclosures, according to SEC documents and SEC staff we interviewed.

Internal supervisory control testing. As we reported in 2016, Corporation Finance’s Disclosure Standards Office (DSO) helps improve consistency in oversight of filing reviews by conducting testing of internal supervisory controls throughout the year. DSO is responsible for managing Corporation Finance’s internal supervisory control and contributes to Corporation Finance’s quality and process improvement efforts. DSO senior staff told us that the office examined filing reviews conducted by SEC staff on a random sample of filings in each year from 2014 through 2016. In DSO’s reviews, DSO examined the documents that are part of the filing reviews conducted by SEC staff, including the underlying filings, filing review reports prepared by SEC staff, comment letters issued, and the associated responses, among other things. Also, DSO staff assessed whether SEC staff had followed the relevant Corporation Finance policies and procedures. For example, DSO checked whether staff followed procedures for second-level reviews and issuing comment letters. However, DSO senior staff said they have not conducted any review specific to climate-related disclosures. Corporation Finance senior staff said DSO submits the results of its testing to its managing executive for use in the division’s management assurance statements. We also reported in 2016 that DSO helped strengthen components of Corporation Finance’s internal control.

Two-level review process. As discussed earlier, SEC generally conducts two levels of review at key steps in the filing review process. The two-level review process helps ensure that staff consistently review disclosures across filings, according to SEC staff we interviewed. For example, the second-level reviewers review the comment letters prepared by the first-level reviewers before sending the letters to companies, according to SEC’s internal policies and procedures. Also, assistant directors and senior assistant chief accountants of the 11 Corporation Finance offices generally meet monthly to discuss recent trends and issues identified in filing reviews in general, which helps ensure that staff assess materiality consistently across industries, according to some SEC staff.

Regulations and guidance. SEC staff can consult regulations and formal and informal SEC guidance for their filing reviews (see table 2 for examples), according to SEC documents and staff we interviewed. SEC posts relevant guidance and other information on its intranet site. Nearly all SEC staff we interviewed said current guidance was sufficient to guide their filing reviews, including the reviews of climate-related disclosures.

Internal and external data. According to SEC’s internal review guidance, SEC staff are expected to consider internal and external data as part of the filing review. As previously noted, some SEC staff told us they consider information from prior filings, internal filing review reports, other filings of companies in the same industry, and external data outside of the filings to supplement their filing reviews. For example, SEC staff can generally use internal and external databases to search prior years’ filings and filing-review-related comments and correspondence with companies. Some SEC reviewers told us that they also compare disclosures with external information, such as companies’ voluntary sustainability reports and financial analyst reports on companies’ earnings and operations, to look for inconsistencies in the companies’ reporting. Although SEC Corporation Finance staff can review external information such as the company’s sustainability report, they do not have the underlying information the company used to determine whether a potential disclosure was material or prepare the sustainability report and cannot perform an independent assessment of the disclosure based on the materiality of the underlying information. For example, SEC staff noted in a 2016 comment letter to an oil company that SEC has compared and identified potential inconsistency between the company’s disclosures on uncertainty about a new climate-related regulation and physical risks and information in the company’s sustainability report. The company stated the climate-related regulatory risks were not material and climate-related risks in their filing were consistent with information in its sustainability report. SEC did not issue any further comments.

Staff training. SEC staff have had some training on assessing materiality and industry-specific issues but fewer training that discussed climate- related disclosures, according to SEC staff.

Training on materiality. Most SEC staff we interviewed said training on materiality assessment was part of staff training or their ongoing on-the-job learning in their day-to-day work. Our review of some SEC training materials showed that training discussions covered federal securities laws and disclosure requirements, disclosure review, and materiality but did not focus specifically on climate-related issues. Also, some SEC staff said they consider materiality based on a given company’s specific facts and circumstances as they review filings in their day-to-day work. For example, two SEC staff we interviewed explained that second-level reviewers help first-level reviewers understand how to apply specific facts and circumstances as they consider materiality when they review filings.

Training on industry-specific issues. All SEC staff we interviewed noted that industry-specific training is provided by individual assistant director offices. For example, some staff mentioned training on disclosures for the oil and gas industry. Other staff noted that they also share information on industry-specific issues as part of their communication or meetings with supervisory staff. However, SEC staff we interviewed did not recall any industry-specific training on climate-related disclosures offered by individual assistant director offices.

Training on climate-related disclosures. Some SEC staff we interviewed identified training on the 2010 Guidance when the guidance was issued or a brownbag discussion on climate-related disclosure issues including the Peabody Energy investigation in 2016. According to SEC senior staff, the 2016 brownbag included a discussion of the 2010 Guidance and was offered to all Corporation Finance staff. In addition, our review of some meeting agendas showed that these meetings sometimes included discussion items on issues related to climate-related disclosures, such as the Peabody Energy investigation and a proposed environmental regulation. Furthermore, new SEC staff receive training on how to conduct filing reviews in general but not specifically on climate-related disclosures, according to some SEC staff.

Most of the SEC staff we interviewed told us they consider the training they have received to be sufficient for conducting filing reviews. Additionally, an SEC OIG survey of SEC staff published in September 2017 asked both first- and second-level reviewers if they felt they had received adequate training and guidance from SEC on how to conduct a disclosure review. Of the 159 who answered as first-level reviewers, 82 percent said that they felt they received adequate training and guidance to conduct disclosure reviews; and of the 130 who answered as second- level reviewers, 83 percent said that they felt they received adequate training and guidance to conduct disclosure reviews. Other staff we interviewed also noted that they receive training through their day-to-day work on an ongoing basis or when new regulations are issued or the need arises.

Staff experience. All eight supervisory staff we interviewed indicated that, as of August 2017, they had at least 10 years of experience at SEC as filing reviewers, while the 12 nonsupervisory staff we interviewed noted that they had from 2 to 18 years of such experience. Also, most of the SEC staff we interviewed indicated that they had some prior accounting or legal experience related to annual filing preparation or review, but they did not have any direct prior experience on climate- related disclosures. However, most SEC staff we interviewed said they generally do not need technical expertise to understand climate-related disclosures. Some staff said they can consult mining or petroleum engineers within Corporation Finance if the disclosures relate to other subjects, such as oil and gas reserves.

Stakeholders Have Mixed Views on the Amount and Specificity of the Current Climate-Related Disclosures

Stakeholders, including investor and industry groups, have different views on whether additional climate-related disclosures, including the amount and specificity, are needed. Some asset management firms and investor groups have highlighted the need for companies to disclose more climate- related information to help investors make more informed investment decisions. Three large asset management firms stated that they are committed to engaging with and encouraging companies to provide additional climate-related disclosures. For example, in 2017, one firm supported shareholder proposals for two companies to report the impacts of climate change on their operations. The proposals passed with majority shareholder support. The Council of Institutional Investors and Ceres stated in their letters commenting on SEC’s April 2016 Concept Release and also told us that the information on environmental risks, including climate risks, has become more significant for investors and companies. The two investor associations also noted that companies’ climate-related disclosures in the risk factors and management’s discussion and analysis sections of the filings generally do not provide investors with sufficient details. They further stated in their letters commenting on SEC’s April 2016 Concept Release that current climate- related disclosures are generally not comparable across companies’ filings. Additionally, SASB reported that climate-related disclosures using quantitative metrics may not be comparable because they lack standardization.

In contrast, representatives from the five industry associations with whom we spoke all noted that they consider the current requirements for climate-related disclosures adequate. They also do not believe additional climate-related disclosures are needed in SEC filings as the filings should include only climate-related information if it is material. Additionally, some companies are providing climate-related information through channels outside of SEC filings. Three of these industry associations also stated in their letters commenting on SEC’s April 2016 Concept Release that they would like to keep the existing requirements for climate-related disclosures.

While some investor organizations we spoke with generally believe more climate-related disclosures are needed, investors have not reached agreement on the priority of advocating for climate-related disclosures or the framework for companies to use to report these disclosures. For example, some members of a subcommittee of SEC’s Investor Advisory Committee have identified climate-related disclosures as a priority issue, but the subcommittee as a whole did not reach agreement that climate- related disclosures should be among its highest priorities. In addition, as previously described, existing reporting frameworks include those developed by CDP, Global Reporting Initiative, SASB, and the June 2017 FSB Task Force final recommendations. Given that these are voluntary frameworks, companies can report climate-related information using any of the frameworks or not use a framework at all. Further, stakeholders advocating for climate-related disclosures have not agreed on whether to adopt one of the existing reporting frameworks or develop a new framework for companies to use in reporting climate-related disclosures. For example, companies have not determined which of the existing reporting frameworks to use or are uncertain on which framework is preferred by investors for reporting climate-related disclosures, according to one investor association, representatives of SEC’s Investor Advisory Committee, and an SEC senior staff of the Office of Investor Advocate.

The SEC senior staff further stated that SEC may be hesitant to recommend a particular framework for companies to use given the uncertainties. Another organization focusing on climate-related disclosures in its letter commenting on SEC’s April 2016 Concept Release suggested that SEC review and consider elements of existing reporting frameworks. Furthermore, SEC’s Investor Advisory Committee, in its letter commenting on the Concept Release, recommended SEC develop an analytical framework on climate-related disclosures, among other things. Most recently in June 2017, the FSB Task Force reported that its recommendations aim to provide a framework to help companies more consistently disclose climate-related information and align their reporting frameworks over time. In particular, the Task Force recommends that companies include material climate-related disclosures in their public filings and encourages standard-setting bodies to support adoption of the recommendations. According to SEC senior staff, while the Task Force recommendations may be helpful if the Commission were to consider new rules on climate-related disclosures in the future, SEC staff is not aware of any specific SEC actions or plans based on the recommendations. Also, additional disclosure requirements or increased scrutiny of companies’ climate-related information—which, if necessary, SEC and Congress can consider—could have mission and resource implications for SEC’s Division of Corporation Finance.

Agency Comments and Our Evaluation

We provided a draft of this report to SEC for review and comment. In oral comments provided on January 10, 2018, senior staff in SEC’s Division of Corporation Finance generally agreed with our findings and provided technical comments, which we incorporated into the report, as appropriate.

As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to interested congressional committees, the Chair of SEC, and other interested parties. In addition, this report will be available at no charge on the GAO website at http://www.gao.gov.

If you or your staff have any questions about this report, please contact Michael Clements at (202) 512-8678 or clementsm@gao.gov, or J. Alfredo Gómez at (202) 512-3841 or gomezj@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix III.

Appendix I: Objectives, Scope, and Methodology

This report examines: (1) steps the Securities and Exchange Commission (SEC) has taken to help companies understand disclosure requirements for climate-related risks, (2) steps SEC has taken to examine changes in climate-related disclosures since the release of its 2010 Commission Guidance Regarding Disclosure Related to Climate Change (hereafter referred to as the 2010 Guidance), and (3) constraints SEC faces when reviewing climate-related disclosures and stakeholders’ views of those disclosures.

To address all objectives, we reviewed SEC documents, including the 2010 Guidance and internal filing review guidance, related to SEC’s review of climate-related and other disclosures in companies’ annual filings. We also reviewed SEC’s 2012 and 2014 congressional reports, titled Staff Report to the Senate Committee on Appropriations Regarding Climate Change Disclosure, and additional information on SEC staff’s ongoing reviews of climate-related disclosures. In addition, we reviewed prior GAO and SEC Office of Inspector General reports related to the 2010 Guidance, climate-related risks, and SEC’s filing review process and reports from stakeholders, including the report on recommendations from the Financial Stability Board Task Force on Climate-related Financial Disclosures (FSB Task Force).

We selected five industries to focus on for this report: oil and gas, mining, insurance, electric and gas utilities, and food and beverage. We selected the first four industries because they were identified by SEC staff, in its 2012 and 2014 congressional reports, as more likely than other industries to be affected by climate change-related matters due to the nature of their operations. We also selected the food and beverage industry because we identified companies in this industry that have submitted climate-related disclosures and can provide perspectives on these disclosures, and SEC had not selected companies in this industry for review in its 2012 and 2014 congressional reports or ongoing periodic reviews of climate-related disclosures. For all five industries, we searched companies’ annual filings to determine whether the industries include companies that have submitted climate-related disclosures in SEC filings or are represented by associations that have submitted comments on SEC’s April 2016 Concept Release related to business and financial disclosures in Regulation S-K. Because we did not search companies’ filings of all industries, industries we focused on in this report may not be a comprehensive list of industries that are affected by climate-related risks and views on the selected industries are not generalizable to other industries we did not include in our review.

To address the first objective, we reviewed SEC’s 2010 Guidance and Division of Corporation Finance (Corporation Finance) policies and procedures on review of disclosures. We determined the number of comment letters SEC issued to individual companies on climate-related disclosures from February 2010 to August 2017. Specifically, we reviewed a 2014 report by Ceres, a nonprofit organization that works with investors, companies, and public interest groups on sustainable business practices, that analyzed and determined the number of SEC comment letters to companies from February 2, 2010 (the date the 2010 Guidance was released) to December 31, 2013. Additionally, using the same keyword search terms—such as “climate change” and “climate mitigation”—that were used in the Ceres report, we determined the number of SEC comment letters issued to individual companies on issues related to climate-related disclosures from January 1, 2014, through August 11, 2017. Specifically, we searched for SEC’s comment letters in its EDGAR (Electronic Data Gathering, Analysis, and Retrieval) system— which is SEC’s record-keeping system for comment letters to companies, among other things—using the keyword search functionality. The search terms we used were not intended to represent a comprehensive list of keywords that may relate to climate-related issues. Therefore, the nongeneralizable sample of comment letters we identified is not intended to be a comprehensive list or representative sample of comment letters on climate-related information in SEC filings. We reviewed the comment letters identified through our search to understand the climate-related disclosure issues SEC staff has identified.

To understand SEC’s efforts to clarify climate-related disclosure requirements for companies and industry groups’ views on SEC’s efforts, we interviewed SEC staff from Corporation Finance and representatives from a nongeneralizable sample of industry groups representing companies in the five industries we selected. Specifically, we interviewed representatives from the following industry groups: American Insurance Association, American Petroleum Institute, Edison Electric Institute, Grocery Manufacturers Association, and National Mining Association. We selected these groups because they represent companies in the five industries in our review and they or their members submitted letters commenting on SEC’s April 2016 Concept Release or their members submitted climate-related disclosures to SEC in 2016. Additionally, we reviewed the letters these groups submitted commenting on the Concept Release to understand their views on climate-related disclosures. Views from the industry representatives with whom we spoke cannot be generalized to those we did not include in our review.

To address the second objective, we reviewed SEC’s 2012 and 2014 congressional reports and additional information on ongoing periodic reviews of climate-related disclosures. We also reviewed SEC’s April 2016 Concept Release, particularly the section that focuses on climate- related disclosures in SEC’s filings. Further, we interviewed Corporation Finance staff to understand steps SEC has taken to assess the effect of the 2010 Guidance and planned actions related to comments on climate- related disclosures for the Concept Release.

To address the third objective, we reviewed SEC documents on the review of climate-related and other disclosures in companies’ filings, including the 2010 Guidance, filing review guidance, and examples of staff training materials. We also reviewed information related to the New York State Attorney General’s investigation of and agreement with Peabody Energy on the company’s climate-related disclosures in SEC filings. To understand the specificity of companies’ climate-related disclosures in annual filings, we reviewed the Sustainability Accounting Standards Board’s (SASB) October 2016 report that analyzed and categorized selected companies’ climate-related disclosures according to their level of specificity. To identify illustrative examples of climate- related disclosures, we used Ceres’ SEC Sustainability Disclosure Search Tool to search annual filings of S&P 500 Index companies, filed with SEC in 2016, in the five industries we selected. We used Ceres’ SEC Sustainability Disclosure Search Tool because it searches companies’ SEC annual filings by industry, identifies relevant climate-related disclosures and their locations within the filings, and reproduces the excerpts of these disclosures in a single report. In a search of Ceres’ database on September 20, 2017, we identified 116 S&P 500 Index companies that included climate-related disclosures in their annual filings filed in 2016. See appendix II for examples of disclosures with varying levels of specificity.

To obtain information on SEC staff’s review of climate-related disclosures—including information on the review process, tools and guidance used in the review, and staff training and experience—we interviewed 20 Corporation Finance staff. Specifically, we interviewed 8 senior supervisory staff from the four Corporation Finance offices that cover reviews of filings of companies in the five industries we selected. We also randomly selected 12 nonsupervisory staff from these same four offices, with a mix of accountants and attorneys and years of experience at SEC. In addition, we interviewed senior staff from Corporation Finance’s Disclosure Standards Office to obtain information on the office’s examinations of the filing review process conducted in 2014 through 2016. Furthermore, we interviewed Corporation Finance senior staff to obtain an understanding of SEC’s enforcement authority in its filing review program and how that differs from the investigation power of state attorney generals.

To understand stakeholders’ views on climate-related disclosures, we reviewed SEC’s April 2016 Concept Release and individual letters commenting on the Concept Release from organizations that represent investors, companies in the five industries we selected, or organizations that focus on climate-related issues. We also reviewed the websites and documents of three investment management firms—BlackRock Advisors LLC, State Street Global Advisors Limited, and Vanguard Group, Inc.—on their efforts to seek additional climate-related disclosures from companies. We reviewed reports by stakeholders, including SASB and the FSB Task Force, to provide perspectives on investors’ views on the current state of climate-related disclosures. We identified these stakeholders because they represent major investor interests or have submitted letters commenting on SEC’s April 2016 Concept Release.

Furthermore, we interviewed representatives from the five industry groups we selected and other nonprofit organizations representing investors or focusing on climate-related issues. Specifically, we interviewed representatives from the following organizations representing investors or focusing on climate-related issues: Center for Climate and Energy Solutions (C2ES)—an independent, nonpartisan, nonprofit organization that works to address climate and energy challenges; Ceres; and the Council of Institutional Investors—a nonprofit, nonpartisan association that represents corporate, public, and union employee benefit funds and endowments. We selected these organizations because they represent investors or focus on climate-related issues and have submitted letters commenting on SEC’s April 2016 Concept Release. Views from the representatives of investor groups with whom we spoke cannot be generalized to those we did not include in our review. Additionally, we interviewed SEC senior staff from the Investor Advisory Committee and the Office of Investor Advocate and an industry representative who is a member of the Investor Advisory Committee to obtain information on investors’ views on climate-related disclosures. We also interviewed Corporation Finance senior staff to understand SEC’s planned efforts, if any, on climate-related disclosures.

Throughout this report, we use certain qualifiers when describing results from interview participants, such as “few,” “some,” and “most.” We define few as two or three; some as four or more but less than most; and most as more than half or nearly all relative to the total number possible. The views of interviewees we selected cannot be generalized to all SEC staff or stakeholders on issues related to climate-related disclosures.

We conducted this performance audit from November 2016 to February 2018 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives.

Appendix II: Examples of Climate-Related Disclosures in Securities and Exchange Commission (SEC) Form 10-K Filings

This appendix provides illustrative examples of climate-related disclosures by two companies in the oil and gas industry. The first example contains boilerplate and unquantified information. The second example contains some quantitative information and metrics. Filings we identified are not intended to be a comprehensive list or representative sample of companies that disclose climate-related information in SEC filings. See appendix I for additional information on the analysis.

Other Items The amount of insurance covering physical damage to our property and liability related to negative environmental effects resulting from a sudden and accidental pollution event, excluding Atlantic Named Windstorm coverage for which we are self insured, varies by asset, based on the asset’s estimated replacement value or the estimated maximum loss.

Risk Factors Climate change initiatives may result in significant operational changes and expenditures, reduced demand for our products and adversely affect our business. We recognize that climate change is a global environmental concern. Continuing political and social attention to the issue of climate change has resulted in both existing and pending international agreements and national, regional or local legislation and regulatory measures to limit greenhouse gas emissions. These agreements and measures may require significant equipment modifications, operational changes, taxes, or purchase of emission credits to reduce emission of greenhouse gases from our operations, which may result in substantial capital expenditures and compliance, operating, maintenance and remediation costs. In addition, our production is used to produce petroleum fuels, which through normal customer use may result in the emission of greenhouse gases. Regulatory initiatives to reduce the use of these fuels may reduce demand for crude oil and other hydrocarbons and have an adverse effect on our sales volumes, revenues and margins. The imposition and enforcement of stringent greenhouse gas emissions reduction targets could severely and adversely impact the oil and gas industry and significantly reduce the value of our business.

Management’s Discussion and Analysis of Financial Condition and Results of Operations We recognize that climate change is a global environmental concern. We assess, monitor and take measures to reduce our carbon footprint at existing and planned operations. We are committed to complying with all Greenhouse Gas (GHG) emissions mandates and the responsible management of GHG emissions at our facilities.

Risk Factors We expect to continue to incur substantial capital expenditures and operating costs as a result of our compliance with existing and future environmental laws and regulations. Likewise, future environmental laws and regulations, such as limitations on greenhouse gas emissions, may impact or limit our current business plans and reduce demand for our products. Our businesses are subject to numerous laws and regulations relating to the protection of the environment. These laws and regulations continue to increase in both number and complexity and affect our operations with respect to, among other things: The discharge of pollutants into the environment. Emissions into the atmosphere, such as nitrogen oxides, sulfur dioxide, mercury and greenhouse gas emissions.

Carbon taxes.

The handling, use, storage, transportation, disposal and cleanup of hazardous materials and hazardous and nonhazardous wastes. The dismantlement, abandonment and restoration of our properties and facilities at the end of their useful lives. Exploration and production activities in certain areas, such as offshore environments, arctic fields, oil sands reservoirs and tight oil plays.

We have incurred and will continue to incur substantial capital, operating and maintenance, and remediation expenditures as a result of these laws and regulations. To the extent these expenditures, as with all costs, are not ultimately reflected in the prices of our products and services, our business, financial condition, results of operations and cash flows in future periods could be materially adversely affected. Although our business operations are designed and operated to accommodate expected climatic conditions, to the extent there are significant changes in the Earth’s climate, such as more severe or frequent weather conditions in the markets we serve or the areas where our assets reside, we could incur increased expenses, our operations could be materially impacted, and demand for our products could fall. Demand for our products may also be adversely affected by conservation plans and efforts undertaken in response to global climate change, including plans developed in connection with the recent Paris climate conference in December 2015. Many governments also provide, or may in the future provide, tax advantages and other subsidies to support the use and development of alternative energy technologies.

Management’s Discussion and Analysis of Financial Condition and Results of Operations Climate Change There has been a broad range of proposed or promulgated state, national and international laws focusing on greenhouse gas (GHG) reduction. These proposed or promulgated laws apply or could apply in countries where we have interests or may have interests in the future. Laws in this field continue to evolve, and while it is not possible to accurately estimate either a timetable for implementation or our future compliance costs relating to implementation, such laws, if enacted, could have a material impact on our results of operations and financial condition. Examples of legislation or precursors for possible regulation that do or could affect our operations include: European Emissions Trading Scheme (ETS), the program through which many of the European Union (EU) member states are implementing the Kyoto Protocol. Our cost of compliance with the EU ETS in 2015 was approximately $0.4 million (net share pre-tax). In Canada during 2015, the Alberta government amended the regulations of the Climate Change and Emissions Act. The regulations now require any existing facility with emissions equal to or greater than 100,000 metric tonnes of carbon dioxide or equivalent per year to reduce its net emissions intensity from its baseline. The reduction is increasing from the current 12 percent in 2015, to 15 percent in 2016 and to 20 percent in 2017. We also incur a carbon tax for emissions from fossil fuel combustion in our British Columbia operations. The total cost of compliance with these regulations in 2015 was approximately $4.7 million. The U.S. Supreme Court decision in Massachusetts v. EPA, 549 U.S. 497, 127 S.Ct. 1438 (2007), confirming that the EPA has the authority to regulate carbon dioxide as an “air pollutant” under the Federal Clean Air Act. The U.S. EPA’s announcement on March 29, 2010 (published as “Interpretation of Regulations that Determine Pollutants Covered by Clean Air Act Permitting Programs,” 75 Fed. Reg. 17004 (April 2, 2010)), and the EPA’s and U.S. Department of Transportation’s joint promulgation of a Final Rule on April 1, 2010, that triggers regulation of GHGs under the Clean Air Act, may trigger more climate based claims for damages, and may result in longer agency review time for development projects. The U.S. EPA’s announcement on January 14, 2015, outlining a series of steps it plans to take to address methane and smog-forming volatile organic compound emissions from the oil and gas industry. The current U.S. administration has established a goal of reducing the 2012 levels in methane emissions from the oil and gas industry by 40 to 45 percent by 2025.

Carbon taxes in certain jurisdictions. Our cost of compliance with Norwegian carbon tax legislation in 2015 was approximately $31 million (net share pre-tax). The agreement reached in Paris in December 2015 at the 21st Conference of the Parties to the United Nations Framework on Climate Change, setting out a new process for achieving global emission reductions.

In the United States, some additional form of regulation may be forthcoming in the future at the federal and state levels with respect to GHG emissions. Such regulation could take any of several forms that may result in the creation of additional costs in the form of taxes, the restriction of output, investments of capital to maintain compliance with laws and regulations, or required acquisition or trading of emission allowances. We are working to continuously improve operational and energy efficiency through resource and energy conservation throughout our operations. Compliance with changes in laws and regulations that create a GHG emission trading scheme or GHG reduction policies could significantly increase our costs, reduce demand for fossil energy derived products, impact the cost and availability of capital and increase our exposure to litigation. Such laws and regulations could also increase demand for less carbon intensive energy sources, including natural gas. The ultimate impact on our financial performance, either positive or negative, will depend on a number of factors, including but not limited to:

Whether and to what extent legislation or regulation is enacted.

The timing of the introduction of such legislation or regulation.

The nature of the legislation (such as a cap and trade system or a tax on emissions) or regulation. The price placed on GHG emissions (either by the market or through a tax). The GHG reductions required. The price and availability of offsets. The amount and allocation of allowances. Technological and scientific developments leading to new products or services. Any potential significant physical effects of climate change (such as increased severe weather events, changes in sea levels and changes in temperature).

Whether, and the extent to which, increased compliance costs are ultimately reflected in the prices of our products and services.

The company has responded by putting in place a corporate Climate Change Action Plan, together with individual business unit climate change management plans in order to undertake actions in four major areas: Equipping the company for a low emission world, for example by integrating GHG forecasting and reporting into company procedures; utilizing GHG pricing in planning economics; developing systems to handle GHG market transactions.

Reducing GHG emissions—In 2014, the company reduced or avoided GHG emissions by approximately 900,000 metric tonnes by carrying out a range of programs across a number of business units. Evaluating business opportunities such as the creation of offsets and allowances; carbon capture and storage; the use of low carbon energy and the development of low carbon technologies. Engaging externally—The company is a sponsor of MIT’s Joint Program on the Science and Policy of Global Change; constructively engages in the development of climate change legislation and regulation; and discloses our progress and performance through the Carbon Disclosure Project and the Dow Jones Sustainability Index.

The company uses an estimated market cost of GHG emissions in the range of $8 to $35 per tonne depending on the timing and country or region to evaluate future opportunities.

Appendix III: GAO Contacts and Staff Acknowledgments

GAO Contacts

Staff Acknowledgments

In addition to the contacts named above, Barbara L. Patterson (Assistant Director), Giselle Cubillos-Moraga (Analyst in Charge), Anna Chung, Cindy Gilbert, Jesse Lamarre-Vincent, Marc Molino, Tovah Rom, Grant Simmons, and Tyler Spunaugle made key contributions to this report.