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“Materiality” of Climate Change Information Under Securities Law

Wednesday, February 5, 2020

Savvy investors are increasingly considering climate-related information in their decisionmaking. How companies model future costs of climate policies, the extent to which they are prepared to adjust to the physical impacts of climate change, and how climate projections impact corporate planning are just some of the information investors are interested in knowing. This argues for considering more climate-related information legally “material” under existing U.S. securities law, and understanding how courts may treat such information is crucial to achieving more expansive disclosure. 

In The Reasonable Investor and Climate-Related Information: Changing Expectations for Financial Disclosures, just published in the February issue of ELR—The Environmental Law Reporter, Hana Vizcarra identifies four trends demonstrating that reasonable investors now deem climate-related information to be material:

(1)    the growing, consistent vocal interest by mainstream investors in climate-related information;

(2)    recent indications that investors use the climate information they get from companies and are seeking out and incorporating additional information;

(3)    companies’ response to investor demands for more information; and

(4)    the consolidation of investment decisionmaking in the hands of a smaller number of fund managers, increasing the importance of their views on climate information.

Wall Street

In light of these trends, international jurisdictions have begun incorporating climate information into their disclosure regimes, but the regulatory environment in the U.S. remains unchanged. A lack of guidance and relevant case law on what climate information is “material” fosters uncertainty, explains Vizcarra. “We are unlikely to see new regulatory guidance, enforcement activity, or legislative action in the near future that clarifies how climate-related information fits into the existing mandatory disclosure regime,” she writes. “As a result, courts will likely set the first guardrails for how to consider climate-related information, increasing the importance of how courts’ understanding of the definition of materiality could apply to climate-related information.”

Vizcarra finds that U.S. courts do not consider environmental, social, and governance (ESG) information broadly. Rather, they will look to “a specific piece of information in relation to an individual company’s situation” in order to determine whether that information is material to a reasonable investor. As a result, “how a court applies the current definition of materiality to new types of information will determine how effectively climate-related information is integrated into mainstream investing.”

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