As the climate change cloud darkened over the United States, American investors called for greater climate risk transparency from corporations. In December 2020, the Securities and Exchange Commission’s (“SEC”) subcommittee of Environment, Social, and Governance (“ESG”) acquiesced to these demands, “issu[ing] a preliminary recommendation that the [SEC] require the adoption of standards by which corporate issuers disclose material ESG risks.” (Allison Herren Lee, SEC Public Statement). To establish a clear and educated ESG disclosure framework, the SEC called for public comments from investors and market players on climate change disclosure. Id. This article discusses those comments, why some companies take issue with reporting ESG risks, and which form ESG disclosures might take.

The SEC’s ESG disclosure overhaul compliments the Biden Administration initiative to prioritize climate reporting. (Dave Michaels, Wall Street Journal). Yet the demand for greater climate risk reporting comes not only from the government, but also from the American people and the corporate world. Ceres, a coalition of investors, environmental organizations, and public-interest groups complained to the SEC that “the current state of climate change disclosure does not meet our needs.” (Katanga Johnson, Reuters). Other environmentally friendly stakeholders welcome the SEC’s open call for climate reporting ideas. For example, technology industry giants Apple Inc. and Microsoft Corp. have often advertised their efforts to reduce their environmental impact and have offered support of the ESG disclosure initiative. (Dave Michaels, Wall Street Journal). However, some American blue chips are worried about what the SEC’s new ESG disclosure requirements will entail. (Andrew Ramonas, Bloomberg). Power players such as “Amazon.com Inc., Chevron Corp., and Walmart Inc., as well as some mutual and pension fund groups, are seeking the [SEC’s] flexibility” as the agency determines how to best implement climate risk reporting. Id.

This begs the question, why are these companies trying to discourage ESG disclosures? Approximately ninety percent of firms in the S&P 500—an index of large-capitalization U.S. equities—already publish voluntary reports disclosing metrics such as carbon emissions and the amount of renewable energy they use. (Dave Michaels, Wall Street Journal). So, companies such as Amazon.com Inc., Chevron Corp., and Walmart Inc. are not asking to be excused from ESG reporting; instead, these companies want the SEC to think critically about the types of disclosures that will be required. (Andrew Ramonas, Bloomberg). Filing ESG disclosures rather than furnishing them could expose these companies to greater legal liability. Id.

Required ESG filings could increase companies’ anti-fraud liability because certain types of SEC reporting can expose companies to civil causes of action. Section 18 of the Exchange Act imposes liability on companies for false and misleading statements in documents filed with the SEC. (SEC Ongoing Investor Protections). In other words, companies that file climate risk reports with the SEC could attract lawsuits from investors if the reports contain any false or misleading statements. (Andrew Ramonas, Bloomberg). In a joint letter to the agency, Alphabet Inc., Facebook Inc., Intel Corp., and other technology giants warned: “Given that climate disclosures rely on estimates and assumptions that involve inherent uncertainty, it is important not to subject companies to undue liability, including from private parties.” Id. One way these companies are seeking legal relief from undue liability is by requesting the SEC to allow companies to “furnish” ESG information to the SEC as opposed to “filing” such information. Id.

Whether a disclosure to the SEC is “furnished” or “filed” determines the applicable liability standards. (Thomson Reuters Westlaw). Securities issuers who furnish disclosures and exhibits receive more favorable treatment under Section 18 of the Exchange Act, which only targets filings: “[Section 18] provides an express private right of action for any person who, relying on a false or misleading statement or omission made in . . . filings made with the SEC, buys or sells a security at a price affected by that statement or omission.” Id. Furnished disclosures are still, however, subject to liability under other provisions of the Exchange Act such as Section 10(b) and Rule 10b-5, which prohibit material misstatements and omissions related to securities sales and purchases. Id. The key difference between these provisions and Section 18 is that these provisions only apply to information released to the public by the issuer and its subsidiaries. (SEC Ongoing Investor Protections).

While the SEC’s ninety-day window for public comments has closed, it remains unknown whether the agency will allow companies to furnish, not file, these disclosures. Public comments supporting the furnishing approach may land on sympathetic ears, as SEC Commissioner Elad Roisman has publicly expressed skepticism over a filing requirement and opined that the SEC should allow for a safe harbor for companies “earnestly trying” to disclose forward-looking ESG information. (Keith Blackman et al., Bracewell LLP). Walmart Inc. and Chevron Corp. have advocated for a hybrid approach through which companies would file certain ESG reports while furnishing other climate data. Id.

 In a world where sea levels are rising across the globe and apocalyptic wildfires rage across the Western United States, a drastic change to how Americans approach climate change must occur. However, requiring ESG disclosures to be submitted as filings is not necessary to achieve this change. Requiring disclosures to be filed would expose companies to litigation under Section 18 of the Exchange Act, especially from institutional investors. (Peter Saparoff, Mintz; SEC Ongoing Investor Protections). Besides institutional investors, plaintiffs have rarely relied on Section 18 to litigate against securities issuers because Section 10(b) is “a general proscription against the use of any manipulative device or contrivance in connection with the purchase or sale of a security.” (John Occhipinti, Fordham Law Review). Because reports furnished to the SEC are already open to causes of action through Section 10(b), it is redundant to add an avenue to litigation that is primarily used by institutional investors. Id. Instead, a hybrid approach would be effective while protecting companies from unnecessary liability. Companies could furnish most ESG disclosures while the SEC could require filings only of information pertaining to the greatest environmental concerns.

The Biden Administration and the SEC are justified in demanding more detailed climate risk reporting. However, in a market where approximately ninety percent of S&P 500 companies already report climate risks in the public forum, requiring such disclosures as filings needlessly exposes companies to liability. (Dave Michaels, Wall Street Journal).