By Chris Kozak, Plews Shadley Racher & Braun LLP
Securities law is not a common topic for discussion in environmental law circles. That may be changing.
Earlier this year, an advisory committee at the U.S. Securities & Exchange Commission urged the agency to become more aggressive in requiring companies to make “ESG” disclosures to investors. The term “ESG” stands for “Environmental, Social or Governance” matters that may impact a company’s risk or valuation. Obvious environmental topics include potential liabilities (such as those created by PFAS, something that is already generating shareholder lawsuits against companies like 3M). But there is growing concern over “soft” liabilities, such as a company’s carbon or methane emissions that may be the target of divestment campaigns by a generation increasingly worried about climate change.
The issue has been polarizing. Republicans have generally resisted imposing additional disclosures and democrats have largely favored them. In August, the SEC rejected broader disclosure requirements in a 3-2 party-line vote, prompting a dissent from two commissioners who wanted more action on “climate risk.” President-Elect Joe Biden has committed to using his term to combat climate change, and leading observers have identified ESGs as “an area that is rife for additional initiatives” and which does not involve congressional involvement.
The tension resurfaced in mid-November 2020, when progressive Senator Elizabeth Warren criticized SEC Chair Jay Clayton at a hearing for not establishing more aggressive and uniform standards for disclosing climate risks. Clayton responded by emphasizing that disclosures need to be “company-specific” and “industry-specific,” and that many risks already must be disclosed under current rules.
For many people—investors and advocates alike—that may not be enough.
Environmental lawyers have a critical role to play in creating workable rules and in advising clients on these issues. Not all environmental risks are created equal. Without heavy participation by environmental lawyers steeped in both technical knowledge of the issues and an understanding of their practical consequences, disclosure rules that are both uniform and workable will be difficult to achieve. At worst, securities law may fall prey to a more complex version of the dihydrogen monoxide prank—which, at its origin, used only ignorance and a scary-sounding chemical name to convince 50 high-school students to vote to ban water—and which has caused endless headaches on social media since.
Disclosures are designed to provide useful information to the recipient. But without active involvement by the environmental-law community, ESGs may end up requiring companies to spread disinformation without knowing it. That is something everyone—republican or democrat—should prefer to avoid.
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