The Securities and Exchange Commission (SEC) recently announced that it is accepting public comments on potential mandated disclosures related to climate change issues. This development reflects a growing trend among companies and governmental entities to consider climate-change related disclosures in company communications to investors. In this interview, Phil Stein, head of Bilzin Sumberg’s Litigation Group, and Benjamin Mitchel, an attorney in Bilzin Sumberg’s Litigation Group, discuss what the SEC’s increasing focus on this issue portends for public companies.
MITCHEL: Hello everybody, I'm Ben Mitchel, an attorney in Bilzin Sumberg's Litigation Practice Group. We're here today to have a very timely discussion about a topic that's very important to all of us: the increasing pressure on American corporations to make additional disclosures relating to their climate change practices. I'm joined today in my discussion by Bilzin Sumberg's Litigation Group Practice Leader, Phil Stein. Phil and I have written on this topic a couple of times thus far and have detailed the SEC's push to gather information from the public and think about what kinds of additional disclosures they may potentially mandate. Now, Phil, thank you very much for joining me for this discussion. My first question to you is when we talk about additional disclosures of climate change related risks, what exactly are we talking about? What are investors asking for from companies?
STEIN: I think the first thing to bear in mind is that we're talking about something that is part of a larger framework of issues. You're reading and hearing a lot about so-called "ESG" disclosures, that's environmental, social, and governance related disclosures. We're talking here today about the "E" prong of that, the environmental or climate change related side. There's a lot of momentum for this whole group of issues to be dealt with, in regulatory filings of one sort or another; the SEC in particular is really pushing this.
I think the second thing to bear in mind before we talk about exactly what might be required is that this is going to be something where some uniformity is going to be required by a particular federal agency, such as the SEC. They're not going to just allow companies to decide what to prioritize and how short or long it should be. Maybe there'll be a little bit of latitude, but mostly it's going to be about following a kind of standardized framework for disclosure, and then plugging in the things that are most applicable to a particular business.
I think the next element of what is likely to come in terms of disclosures is there's going to be a need for companies to talk both in terms of principles, general principles and how they're approaching, sustainability and resiliency issues, but also some metrics, some hard facts and some data that investors can use in deciding how they want to allocate their investment dollars. I think then when you think specifically about what may be required, I think it's reasonable to assume that what companies are going to need to do is talk about risks and opportunities, related to the physical structures that they have, their headquarters or other physical structures that they have, and how those places might be affected by climate change related issues. I think the next thing they're going to have to talk about is their products, to the extent their products may be affected by these kinds of issues.
And I think their business generally: if you're in an industry or in an area in which your supply chain or your day-to-day operations for one reason or another are likely to be affected or disrupted at some point by some sort of climate event, you're going to need to disclose that and investors will want to hear about it.
Likewise, it's not just the negative stuff. To the extent you see some real opportunities in your business, as the world becomes more focused on climate change related issues, investors want to know about that. So I think we're looking at a comprehensive framework, again, part of a larger discussion about ESG issues and something where there is going to be some guidance, but a need to focus on the things that are most likely to be most important to investors.
MITCHEL: Right, absolutely, and I think that segues nicely into the next question that I wanted to pose to you, which is: The SEC development is a big one, but surely there are other regulatory and non-regulatory entities that are taking a look at this issue. Do you see that the next step is going to be their announcement of a framework? Or do you think we're going to continue to sort of be in this feeling out period where we're figuring out what exactly companies should be putting forward?
STEIN: You know, I think we're at a time of interesting legal and business developments affecting the likely ESG disclosure requirements to come. On the legal side, certainly I think the SEC looms largest right now in terms of expectations that we have, that they are going to announce a framework and not just be kind of feeling things out; that they are going to come up with something fairly comprehensive that they want companies to use as their guide in submitting disclosures in SEC filings. Beyond that, I don't think there's any reason to believe the SEC is going to be alone. I think there will probably be some other agencies, at the federal level, perhaps at the state level and perhaps even internationally, that are going to mandate that there be some similar form of disclosure, though maybe not identical to what the SEC is going to require.
There are also business developments that are afoot that are really driving this issue. We know for example, that many companies themselves, Uber being a recent example, have come out and said, we think that there should be ESG disclosures and we want to talk about these issues and we understand that they're important to investors. On the investor side and in the private equity world, for example, Collier Capital recently did a survey in which somewhat surprisingly they found that more than 75%, more than three quarters, of limited partners in partnerships were demanding more in terms of disclosures from general partners and other interested parties about what the ESG related risks, especially climate related risks, might be for a particular company. 47% of respondents in another survey said that as they look as private equity investors to evaluate what the companies are that they want to be investing in over the next five years, what's going to be a really important driving factor for them is exactly what they can ascertain from the companies; what they learned from the companies about environmental, especially again, climate change related risks.
MITCHEL: Yeah and I think it's also important, something that you and I have discussed that we've written about a little bit- some of the obstacles that citizen litigants have run into, in trying to bring cases, bring claims, whether it's against companies, against government entities, for failing to adequately consider and address these risks so these kinds of frameworks and regulations and legal developments, I think are important, not just for the big investor, but also for the everyday person that wants to see these kinds of things really considered.
STEIN: Yeah, what's happening on the regulatory side and with the pressure from some of the business groups is in a sense kind of filling a void that some of the plaintiffs, some of the activists, might be feeling when they go into the court system. They, not all that surprisingly, get results in court like courts saying, well, we don't see that you have any concrete, particularized injury that can be redressed here in court, and therefore we question whether you have standing. So a lot of these cases, virtually all of them that you and I have looked at, aren't going anywhere so far, but again, it doesn't matter that much in terms of what may be required of companies in the next year or two, because of what's going on on the regulatory side and in the business community.
MITCHEL: Right, and you know, obviously we're talking about the things that are coming down the pike, the things that we're starting to see. The beginnings of that will kind of dictate the future of this area. As it stands now, what would you tell corporate counsel who is thinking about these things and maybe staying on top of them? What would you tell a corporate in-house counselor are things that they should be doing both as far as staying up to date on these kinds of things and just in running their businesses?
STEIN: I think first of all they do need to recognize that this change is coming; that there are going to be these kinds of requirements going forward. I think what flows from that is that they need to, to the extent they haven't already, really begin undertaking, in earnest, an assessment of what the climate change related problems may be, what the risks may be, and what the opportunities may be for their business, so that they can begin to kind of formulate in their minds, what their ultimate disclosure may look like. Again, subject of course, to what the SEC or other agencies are going to mandate in terms of the general form that needs to be followed, you can at least start thinking about where we are as a business and what are, again, what our risks and opportunities may be as we face greater climate change related issues, in all likelihood, in the coming years. And I think the next thing that that should flow from that is beginning really as just kind of a matter of due diligence and covering yourself, to create a paper trail that these kinds of issues are being assessed, they are being considered, that board members or board committees or senior managers are focused on these issues and taking action and that compliance officers are looking not just at what might be, what might need to be done to comply with forthcoming SEC requirements, but also just in terms of climate change related issues, generally, and climate change regulations, generally. What can a company be doing to comply now, sooner rather than later, obviously, with what the requirements are, across a whole host of areas, across a whole host of agencies?
So I think the short answer to all that is that there is a lot that can be done and that now really is the time to be doing it. And staying abreast of what both the SEC and other agencies are doing, what states are doing at the state governmental level to prepare for a world in which more and more needs to be disclosed by management formally in corporate filings of one sort or another, I think really is a must at this point.
MITCHEL: I also think it's important to highlight that not only is it the case that this will help corporate counsel and companies deal with regulatory issues now and into the future. But these are the kinds of considerations that today's investor really cares about.
These are the kinds of things that I think will help companies to sustain and build themselves into the future. So I think it's important to realize that, you know we're attorneys and we're writing about the legal and compliance side of it, but just from a business operational perspective, I think there are benefits to be had in maximizing efficiencies.
And I think it's also going to attract a new generation and maybe a new day of investor to keep these things top of mind.
STEIN: Sure. I spoke earlier about what private equity investors and limited partners are saying. We're talking generally about pretty sophisticated, pretty experienced investors, but even at the less sophisticated or less experienced end of things, you've got a lot of citizens out there, citizen activists or people who aren't even that much activists, but who at least really care about these kinds of issues, who really are going to allocate available funds for investment where they think it makes the most sense to do things from an ESG standpoint.
Again, perhaps most importantly to some of them it'll be what the environmental slash climate change related risks and opportunities are for particular businesses. We are seeing more and more of that. And that's why it's not just a matter of identifying risks, but also identifying opportunities.
MITCHEL: Absolutely. And I think that's a really salient point to sort of wrap up on. Phil, thank you very much for participating in this very important and timely discussion.
STEIN: Thanks a lot.
MITCHEL: We look forward to bringing you more information about this topic and other topics, and all of that can be accessed at Bilzin Sumberg's Lawcast, where we have a whole page of interesting discussions about topics just like this one.