How SEC Climate Disclosure Rules Could Empower Whistleblowers

Climate Risk Disclosure

Around the world, whistleblowers are key to protecting the environment, a fact that whistleblower advocates highlight each Earth Day. According to the National Whistleblower Center, the U.S. Securities and Exchange Commission (SEC) could further empower whistleblowers to help fight the climate crisis by enacting climate disclosure rules which were proposed last year.

In March 2022, the SEC proposed rule changes that would require publicly traded companies to make certain climate-related disclosures, including information about climate-related risks.

According to the SEC, under the proposed rule changes registered entities would be required to disclose information about:

“(1) the registrant’s governance of climate-related risks and relevant risk management processes;

(2) how any climate-related risks identified by the registrant have had or are likely to have a material impact on its business and consolidated financial statements, which may manifest over the short-, medium-, or long-term;

(3) how any identified climate-related risks have affected or are likely to affect the registrant’s strategy, business model, and outlook; and

(4) the impact of climate-related events (severe weather events and other natural conditions) and transition activities on the line items of a registrant’s consolidated financial statements, as well as on the financial estimates and assumptions used in the financial statement.”

“I am pleased to support today’s proposal because, if adopted, it would provide investors with consistent, comparable, and decision-useful information for making their investment decisions, and it would provide consistent and clear reporting obligations for issuers,” said SEC Chair Gary Gensler.

Following the announcement of the proposed rules, the National Whistleblower Center (NWC) filed a formal comment supporting the proposal. In their comment, NWC urges the SEC to fully utilize the highly successful SEC Whistleblower Program in its enforcement of the rules and outlines ways that this can be accomplished.

“NWC commends the SEC for taking action to require more accurate disclosures regarding public companies’ climate-related impacts,” the comment states. “Whistleblowers will be key to the successful enforcement of the Climate-risk Disclosure Rule, and their utility would be bolstered by clear standards, prioritization of transnational whistleblowers, and an improved related action rule. We urge the Commission to take the foregoing steps to ensure that the Dodd-Frank Act whistleblower program is at the forefront of its enforcement strategy.”

Through the SEC Whistleblower Program, qualified whistleblowers, individuals who voluntarily provide original information that leads to a successful enforcement action, are entitled to an award of 10-30% of the funds collected by the government.

“If the Climate Disclosure Rules are enacted, whistleblowers will play a vital role in bringing violations to light, as they possess inside information about whether a registrant’s disclosures of climate-related risks accurately reflect the registrant’s conduct,” NWC’s comment states.

The comment continues: “In the context of protecting investors from frauds related to inaccurate climate related disclosures the SEC should send a powerful message to the regulated community and potential whistleblowers that the Commission will act on climate-related whistleblower tips. This can be communicated by taking the following steps: (1) prioritize the review of climate-related intakes; (2) prioritize filing enforcement actions in climate-related cases, even when the potential recovery is small; (3) exercise its discretion to grant awards even when such grants may not be required under the law or regulations; (4) pay rewards at the 30% level in all cases unless factors exist that require the reduction of a reward under the current published rules.”

The proposed climate-disclosure rules are part of a broader shift by the SEC towards an increased focus on climate and other environmental, social, and governance (ESG) issues. The agency has included climate and ESG issues in recent versions of the Division of Examinations’ annual examination priorities. Furthermore, in 2021 the SEC created a Climate and ESG Task Force in the Division of Enforcement. The task force focuses on developing initiatives to proactively identify misconduct related to climate and ESG issues. The task force additionally “evaluate[s] and pursue[s] tips, referrals, and whistleblower complaints on ESG-related issues.”

“Climate risks and sustainability are critical issues for the investing public and our capital markets,” said then-Acting Chair of the SEC Allison Herren Lee. “The task force announced today will play an important role in enhancing and coordinating the efforts of the Division of Enforcement, the Office of the Whistleblower, and other parts of the agency to bolster the efforts of the Commission as a whole on these vital matters.”

In addition to helping push ESG issues to the forefront of the SEC’s agenda, Lee was also a staunch advocate of the whistleblower program during her time at the SEC. In September 2020, she stated that whistleblowers “display extraordinary bravery to expose fraud and wrongdoing, and to shine light in some very dark places. She added that “in doing so, they reinforce our fundamental values – that the rule of law matters, and no one is, or should be, above the law.”

On March 8, the whistleblower law firm Kohn, Kohn & Colapinto announced that Lee had joined the firm as Of Counsel.

Further Reading:

SEC’s Proposed Climate Risk Disclosure Requirements Pave Way for More Climate Whistleblowers

National Whistleblower Center Supports Proposed Climate Disclosure Rules

SEC Signals Increased Focus on Climate Issues, Encourages Whistleblowers to Come Forward

More SEC Whistleblower News on WNN

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