When Meredith and I were drafting our sample disclosure based on the final SEC rules (members can access that here), she brought up an interesting point about physical risks – business exposures (e.g., property damage or loss) resulting from weather events. We discussed that while certain aspects of physical risk may be hypothetical, it is risky to claim climate-based physical risks as hypothetical if the company has actually faced such events in the past. Last week, Cydney Posner of Cooley wrote about this concept, albeit in relation to an SEC enforcement “mini-sweep” on cyber risk – but the lesson still is relevant to climate disclosures. According to Cydney:
“the SEC announced settled charges against four companies for ‘making materially misleading disclosures regarding cybersecurity risks and intrusions…” The SEC charged that each of these companies learned that the ‘threat actor’ that was probably the cause of the SolarWinds hack had ‘accessed their systems without authorization, but each negligently minimized its cybersecurity incident in its public disclosures.’ In two instances, the companies were alleged to have framed their disclosures as hypothetical or generic risks… Jorge G. Tenreiro, Acting Chief of the Crypto Assets and Cyber Unit, cautioned that ‘[d]ownplaying the extent of a material cybersecurity breach is a bad strategy… In two of these cases, the relevant cybersecurity risk factors were framed hypothetically or generically when the companies knew the warned of risks had already materialized. The federal securities laws prohibit half-truths, and there is no exception for statements in risk-factor disclosures.’”
Meredith wrote about the dissenting opinion from Commissioners Peirce and Uyeda.
Again, we have to look past the cyber element of this and think about it in the setting of climate risk disclosures: if your company has experienced past losses as a result of a hurricane, for instance – can you consider future physical hurricane losses hypothetical? Probably not a good idea.
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