In the past few years, a lawsuit was filed by Exxon Mobil Corporation (Exxon) shareholders alleging that Exxon failed to properly disclose climate-related risks to its assets and operations. In that same time frame, state and federal investigations have been conducted against Exxon on similar grounds. Perhaps as a result of these and similar matters, on September 24, 2018, U.S. Senator Elizabeth Warren introduced bill S 3481, the Climate Risk Disclosure Act of 2018 (Act).

Climate Risk Disclosures

The Attorney General of New York and the Attorney General of Massachusetts are currently investigating whether Exxon misled investors and the public about climate change and its potential effects on Exxon’s business. In August 2018, a federal District Court judge in Texas refused to dismiss a lawsuit filed against Exxon by investors alleging that Exxon’s fraudulent misrepresentations regarding climate change had impacted the value of Exxon stock. In the same month, President Donald Trump’s administration dropped a two-year Securities and Exchange Commission (SEC) accounting investigation into Exxon’s valuation of its reserves and its climate risk disclosures.

Under current regulations, the SEC has issued guidelines suggesting that public companies consider the effects of climate change on their assets, but the SEC has not mandated any specific climate risk disclosures. The Act would potentially remedy this perceived omission by requiring public companies to disclose information about their exposure to climate-related risks.

The press release introducing the Act notes that climate change may impact companies in two ways. First, the direct results of climate change, including rising sea levels and extreme weather patterns, can threaten the value of company assets. According to Freddie Mac, climate change appears “likely to destroy billions of dollars in property and to displace millions of people,” producing “economic losses and social disruption…likely to be greater in total than those experienced in the housing crisis and Great Recession.” Second, new regulations to address global climate change could affect the value of company assets as a result of an expected transition to a low-carbon economy. This could be problematic due to a concept known as the “carbon bubble.” The “carbon bubble” anticipates that current investments in fossil fuels will lose their value as the world transitions to a low-carbon economy. According to the press release, the “carbon bubble” has been estimated at approximately $1-$4 trillion in value and the “market lacks information about companies’ exposure to these risks and it appears to dramatically undervalue the potential impact of climate change.”

According to co-sponsor U.S. Senator Jeff Merkley, the Act is necessary because:

• . . .[w]hile the impacts on the ground are visible, it’s much murkier for investors, making it harder to understand clearly the full risks associated with their investments from climate chaos and fossil fuels.

Co-sponsor U.S. Senator Brian Schatz added:

• . . .[p]ublicly traded companies have an obligation to their shareholders to disclose all material risk, and climate change is no longer a theoretical problem to be contended with some time in the future. It is here, and it is costing companies money. That cost must be analyzed, predicted, and disclosed.

Proposed Climate Risk Disclosures

The Act seeks to mandate climate risk disclosures by directing the SEC to issue rules requiring every public company to disclose:

• •Its direct and indirect greenhouse gas emissions

• The total amount of fossil-fuel related assets that it owns or manages

• How its valuation would be affected if climate change continues at its current pace or if policymakers successfully restrict greenhouse gas emissions to meet the Paris accord goal; and

• Its risk management strategies related to the physical risks and transition risks posed by climate change.

The SEC would also be directed to tailor these disclosure requirements to different industries and to impose additional disclosure requirements on companies engaged in the commercial development of fossil fuels.

Conclusion and Implications

Many debate the existence of and the effects from climate change. Thus, even if S 3481 is passed by Congress and signed into law, it will remain to be seen how the Act is interpreted and what is ultimately disclosed.

(Kathryn Casey)