Disclosure of Private Environmental Governance Risks

Abstract

This Article identifies a gap in the securities disclosure regime for climate change and demonstrates how filling the gap can improve financial disclosures while accelerating climate change mitigation. Private climate initiatives have proliferated in the last decade. Often led by advocacy groups, these private climate initiatives have used naming-and-shaming campaigns and other means to induce investors, lenders, insurers, retail customers, corporate supply chain customers, and employees to pressure firms to make and implement climate change mitigation commitments. Based on an empirical assessment of the annual reports filed with the Securities and Exchange Commission (SEC) by Fortune 100 firms and the largest firms in several fossil fuel-heavy sectors, the Article concludes that roughly a third of these firms disclose the risks and opportunities posed by private climate initiatives. But the assessment also finds that disclosures vary substantially among similar firms and among similar sectors. The Article argues that this heterogeneity in disclosure is not surprising given that the SEC’s 2010 climate guidance and other disclosure regimes do not call sufficient attention to private climate initiatives, and many lawyers, accountants, business managers, and policymakers were trained to think of environmental risks only in the context of government regulatory measures. The securities disclosure literature focuses principally on whether non-material climate risks should be disclosed, but in so doing it overlooks the importance of the material risks and opportunities posed by private climate initiatives. Revisions to the SEC guidance and other disclosure regimes to account for private initiatives can be adopted more quickly, produce more complete financial disclosures, and yield greater and more durable emissions reductions than many other regulatory approaches.

Keywords: SEC, climate change, financial disclosure, policymaking, climate initiatives, private governance, governance, environmental risk, environmental law