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Under SEC’s new climate rule, material climate-related risks must be disclosed. In the disclosure, “a registrant should describe whether such risks are reasonably likely to manifest in the short-term (i.e., the next 12 months) and separately in the long-term (i.e., beyond the next 12 months).” The SEC’s final release goes on to clarify that 

“this temporal standard is generally consistent with an existing standard in MD&A… The existing MD&A standard also generally requires that a registrant ‘provide insight into material opportunities, challenges and risks, such as those presented by known material trends and uncertainties, on which the company’s executives are most focused for both the short and long term, as well as the actions they are taking to address these opportunities, challenges and risks.’”

There is more:

“The ‘reasonably likely’ component of the rules we are adopting, as with the same standard in MD&A regarding known trends, events, and uncertainties, is grounded in whether disclosure of the climate-related risk would be material to investors and requires that management evaluate the consequences of the risk as it would any known trend, demand, commitment, event, or uncertainty. Accordingly, management should make an objective evaluation, based on materiality, including where the fruition of future events is unknown.”

Most ESG and climate professionals probably know materiality under U.S. law is based on the US Supreme Court decision TSC v Northway and cast in terms of a “reasonable investor” and information available in the “total mix”. But in reality, the ball doesn’t stop rolling there – things are more complicated. John Jenkins pointed me to an article (subscription to is required) he wrote in 2018 on the US Supreme Court’s decision in Basic v. Levinson, a case cited by SEC in two footnotes. Basic “extended the application of the Northway reasonable investor standard to contingencies” – an event that may never occur (a concept quite relevant in the context of physical, regulatory and transition risk predictions). John’s article covers a lot of ground that I won’t attempt to summarize. 

Even though the rule is currently in limbo, what is most important to understand is that the call about what is “reasonably likely” in US legal disclosures on climate risk must be made by experienced securities lawyers in the context of contingencies and Basic – not CSOs or sustainability, climate and ESG professionals alone. Applying Basic to physical, regulatory and transition risk predictions could lead to interesting determinations of what is – and isn’t – included in a company’s climate disclosure.

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The Editor

Lawrence Heim has been practicing in the field of ESG management for almost 40 years. He began his career as a legal assistant in the Environmental Practice of Vinson & Elkins working for a partner who is nationally recognized and an adjunct professor of environmental law at the University of Texas Law School. He moved into technical environmental consulting with ENSR Consulting & Engineering at the height of environmental regulatory development, working across a range of disciplines. He was one… View Profile