Bates Research | 10-15-21
Climate Change-Related Risk: New SEC Guidance on Disclosures, Treasury’s FIO Evaluating Impact on Insurance
Remember 2010? Prince William and Kate got engaged. Tiger Woods apologized. BP Deepwater Horizon exploded. And Mark Zuckerberg was named Time Magazine’s “Person of the Year.” Also in February 2010, the SEC issued guidance to public companies on climate change-related disclosure obligations. Fast forward over ten years later and on September 22, 2021, the SEC Division of Corporation Finance (“Division”) reminded issuers about complying with that 2010 guidance. The Division offered an “illustrative letter” containing “sample comments” on the disclosure of climate change-related risk that “may be required by the 2010 guidance.”
Meanwhile, another federal initiative on climate change took place on August 31, 2021. The Department of the Treasury’s Federal Insurance Office (“FIO”)—an office established under the Dodd Frank Wall Street Reform Act—issued a broad request for information on climate-related financial risk as it affects the insurance sector. This is a significant early-stage initiative with potential serious ramifications for the insurance industry. Here, we look at these federal efforts.
SEC Advises Issuers on Climate Change Risk Disclosure
In the newly published guidance, the SEC reminds issuers that in addition to its general disclosure requirements, SEC rules and regulations require that registered companies disclose climate-related information on the basis of the agency’s 2010 guidance.
The SEC underscored generally that companies must disclose material matters and not make misleading statements. Information that must be disclosed may relate to a business description, material litigations, facts, and circumstances with the potential for creating special risks, and any operations or operational results that may have been the subject of “management’s discussion and analysis of financial condition.”
Referring to the 2010 guidance, the SEC added that disclosure must include the direct and indirect impact that climate-related legislation, regulation, international treaty, or business trends may have on the company, as well as any physical impact the company may have suffered because of a climate event or change. Those areas were the categories of concern contained in an “illustrative letter” that the SEC issued. By publishing it, the SEC revealed its expectations for what firms should provide in anticipation of the agency’s intent to “selectively review” company filings.
In the letter, the SEC also requested information (i) that might be relevant from a company’s corporate social responsibility report; (ii) on any increases in compliance costs associated with climate change; and (iii) if applicable, the effect of carbon credits or offset sales and purchases. The SEC letter closes with a reminder to be accurate.
Treasury’s FIO Asks for Market Information on the Impact of Climate Change on Insurance
Underlying another request for information, FIO cites extreme weather volatility, corresponding economic losses, changing socio-economic concerns, insurer’s responses to these challenges, and a market that is increasingly unable to provide affordable and available property coverage. FIO also notes that “insurers could be vulnerable to potential decreases in asset values arising from the transition towards a low-carbon economy.”
The observations are further highlighted in FIO’s Annual Report on Insurance (pp. 64-73) issued on September 30, 2021. In both documents, FIO reiterated its three categorical climate-related priorities for: (i) insurance supervision and regulation, (ii) insurance markets and mitigation/resilience (including the potential for climate change-related disruptions of private insurance coverage in U.S. markets), and (iii) insurance sector engagement. FIO asks for commentary about the areas and how it can best collect data and monitor and assess the insurance sector on climate-related “physical risks, transition risks, and liability risks” (including on insurers’ underwriting activities, market activities, and investment activities).
FIO plans to review practices and resources concerning supervision, including “examination policies and procedures, solvency assessment and techniques, data availability and integrity, public disclosures, modeling, and forward-looking assessments.” On the state of insurance markets, FIO said it will examine the insurability of disasters produced or exacerbated by climate change, (wildfires, hurricanes, floods, wind damage, and extreme temperatures) and further assess the availability and affordability of coverage for underserved communities and consumers, minorities, and low- and moderate-income persons. On insurance sector engagement, FIO said it wants to work with the insurance industry “to assess how the sector may help achieve national climate-related goals, including mitigation, adaptation, and transition to a lower carbon economy” and to support “resilience in critical infrastructure, as well as in supporting green investment initiatives.”
To those ends, FIO’s request poses 19 open-ended questions on the above priorities, as well as on the kinds of data elements necessary for accurately assessing the risk, how it can be collected, and how it could be made available to the industry. Written comments are due by November 15, 2021.
The new SEC guidance reinforces standard existing disclosure requirements (on material information, operations results, and other risks), and pushes climate-related guidance to the top of the compliance priority list. More and more, the SEC has expressed concern for companies using social responsibility and in particular, climate-related concern as an embellishment to corporate marketing efforts. The illustrative letter suggests that the agency will be looking closely at those firms for adequate disclosures that will not mislead investors. Compliance professionals—take note.
The extent of the FIO request for climate-related information on the insurance sector is breathtaking. It is as much a policy pronouncement on the possible necessity to restructure the entire insurance industry as it is a request for information on how best to do it. But the recent regulatory attention to climate change means more compliance resources will need to be devoted to address the implications. Bates will keep you apprised.
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