Yesterday, Bloomberg’s Matt Levine wrote about whether it is fraudulent under US securities law to not mention a potentially material risk in SEC filings. The article is a good read and I recommend reading it to get the full picture. It has relevance to climate disclosures – under both existing US securities regulations and the new climate rule once companies will be required to comply.
“Simply not mentioning a bad thing is not fraud under US securities law. The law (Rule 10b-5) says that it’s fraud ‘to make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading.’ So lying — saying something that isn’t true — is securities fraud. And many omissions are securities fraud, if the company omits information that is ‘necessary in order to make the statements made … not misleading..’ But it is not securities fraud simply not to mention a bad thing. If a bad thing happens, and the company doesn’t say anything about it, and it doesn’t say anything that might be misleading, that’s not securities fraud.”
Most of the examples Matt offered are potential future happenings – i.e., contingent risks. The article discusses a specific case where shareholders of Macquarie Infrastructure Corp. brought suit against the company for not discussing a relevant UN ban on fuel oil that led to a 41% drop in the company’s stock price. Last week, the US Supreme Court ruled on
“whether the failure to disclose information required by Item 303 [Regulation S-K] can support a private action under Rule 10b–5(b), even if the failure does not render any ‘statements made’ misleading. The Court holds that it cannot. Pure omissions are not actionable under Rule 10b–5(b).”
Keep in mind the ruling is not about regulatory enforcement, but it’s still important for climate matters. I wrote last month that securities counsel – not CSOs or sustainability staff – should be the ultimate decision maker on “materiality” and what is disclosed relative to ESG/climate in SEC regulatory filings. It isn’t that CSOs don’t have valuable input, but they shouldn’t think their position is necessarily determinative. As more companies disclose climate risks, we’re likely to see increased nuance and complexity in how climate issues and materiality relate to each other – especially for future and contingent risks.
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