United States: Activist Investor Group Ceres Issues Climate Change Reporting Assessment along with New Proposed Standards for Sustainability Disclosure, Recommending Enhanced Reporting Obligations

Activist investor group Ceres has issued two new documents focused on climate change and sustainability reporting, just as companies are in the midst of the busy financial reporting season. Using the spring reporting season as a backdrop that brings with it heightened scrutiny on corporate disclosure requirements and policies, one report assesses developments in climate change reporting and in Securities and Exchange Commission ("SEC") guidance from 2010 through 2013, while the other presents recommendations for stock exchange requirements related to sustainability reporting. A brief review of each report is presented below.

Cool Response: The SEC & Corporate Climate Change Reporting – SEC Climate Guidance & S&P 500 Reporting – 2010 to 2013, by Ceres (Coburn and Cook), February 2014. Ceres' February 2014 Cool Response report evaluates the scope of climate risk disclosure of S&P 500 companies from 2009 through 2013, reviews the extent of SEC enforcement and other activity related to corporate climate change risk disclosure, and concludes with recommendations—directed to both the SEC and to publicly traded companies—for improvements to risk disclosure for investors.

The assessment starts with the fundamental premise that climate change creates material risks for many companies and that without climate change risk assessment in SEC filings, investor decisions do not adequately account for these risks. According to the report, early pressure from Ceres and other groups regarding this data gap resulted in the SEC's issuance of its 2010 Guidance Regarding Disclosure Related to Climate Change, following which the SEC has issued a number of comment letters and, through its staff, has focused increased attention on climate disclosure issues.

From this starting point, Cool Response presents an assessment of 10-K filings by S&P 500 corporations from 2009 through 2013. Ceres' key findings include the following:

• While the adoption by the SEC of the Guidance triggered an increase in disclosure of climate change risk in 2010, climate change disclosure leveled off thereafter, resulting in little improvement since 2010.
• Many corporations do not discuss climate change risk in their annual SEC filings.
• There is wide variability, in both length and quality, in the climate change disclosures made in annual filings.

Cool Response at 11. The report then turns to the SEC's own review of annual filings during this time, analyzing the extent to which SEC staff members issued comment letters that addressed climate change risks. Ceres concludes generally that the SEC issued a minimal number of letters, that high-risk sectors were not adequately targeted, that the comment letters were limited in scope, and that the letters resulted in little change in actual disclosures. Cool Response at 26–27.

Based on the assessment summarized above (and presented in significant detail in the report), Ceres presents a series of recommendations to both the SEC and companies for improvements to climate change disclosure in annual filings. The report's recommendations include a suggestion that the SEC place more scrutiny on climate change disclosures in annual filings and exercise its comment letter authority more aggressively. The report also recommends that the SEC should target those industry segments most at risk from climate change, including fossil fuel components of the energy sector and the transportation sector. In addition, Ceres recommends that SEC create a task force to focus on review of climate change risks as well as better inter-agency coordination, such as formal information-sharing with the United States Environmental Protection Agency. Cool Response, 28–31. In terms of recommendations to companies, the report recommends the development of corporate governance structures and systems that address climate issues, including both risks and opportunities, as well as enhanced recordkeeping of emissions and emissions trends. The report also encourages companies to better identify and understand risks associated with climate change and disclosure of this information in its SEC filings. Cool Response, at 31–35.

Ceres has established itself in the climate change disclosure arena, and companies should follow the SEC's reaction to this report closely. Given the heightened focus that may result from the recommendations coming out of Ceres' review, companies should continue to diligently review and disclose climate change risks in accordance with the SEC's requirements. Companies may also find value in reviewing the report's assessment as it relates to additional "best practices" to improve the adequacy of SEC disclosures, which could help protect companies in the event of greater SEC scrutiny.

Investor Listing Standards Proposal: Recommendations for Stock Exchange Requirements on Corporate Sustainability Reporting, by Ceres and the Investor Network on Climate Risk (a project of Ceres), March 2014. Ceres also recently issued a report presenting proposed minimum global standards for corporate sustainability reporting, which standards would provide investors with improved sustainability information on a variety of levels. The proposed standards, prepared by investor members of Ceres, consist of a three-part recommendation for a listing rule on sustainability disclosure. Section II of the report presents a detailed description of the three parts, briefly outlined as follows:

Proposal at 5.

For each Item, the report describes the basis for the recommendation, includes a detailed explanation of the recommendation, and provides recommendations for implementation. The report also summarizes investor feedback on the proposal as well as further recommendations for issuers, exchanges, and regulators as these groups evaluate the proposal and implementation challenges.

As with the findings and recommendations discussed with respect to the Cool Response report, if the proposal presented by Ceres gains traction with the SEC or other exchanges, companies will want to understand the proposal and, more importantly, take steps to ensure they have a voice in the drafting of any future standards.

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