On March 21, the U.S. Securities and Exchange Commission (SEC) proposed rule changes that would require publicly traded companies to make certain climate-related disclosures, including information about climate-related risks. On April 22, Earth Day, the National Whistleblower Center (NWC) submitted a comment in support of the proposal. NWC also highlighted a number of ways the agency can better empower climate whistleblowers.
“NWC commends the SEC for taking action to require more accurate disclosures regarding public companies’ climate-related impacts,” the letter states. The SEC’s proposed rule requires registered entities to disclose information about how climate risks may impact their company and the steps being taken to assess and manage those risks.
During the SEC’s March 2021 call for public comment on the issue, NWC submitted comments urging the SEC to update its climate risk disclosure requirements and to center the agency’s whistleblower program in its enforcement efforts. NWC explained that whistleblowers are key in exposing inconsistencies in companies’ public disclosures about climate risks but are hesitant to come forward due to the lack of “strong and effective substantive rules prohibiting misleading corporate statements concerning climate and environmental commitments.”
If the SEC’s proposed rule changes are adopted, they would make the failure to disclose climate risks a securities law violation. This means that individuals with knowledge of undisclosed climate risks could qualify for awards and protection under the SEC Whistleblower Program.
In addition to expressing support for the proposed rule, NWC also offered a number of detailed recommendations that would allow the SEC to fully leverage its whistleblower program in the enforcement of the climate-risk disclosure rule. “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,” the letter states.
NWC recommends that the SEC defines the materiality standard to provide whistleblowers, investors, and registrants clarity about the types of disclosures that are required. The proposed rules would require companies to disclose whether any climate-related risk is reasonably likely to have a “material impact.” NWC recommends that the SEC offers a clear definition of materiality and that this definition takes a holistic approach.
“Whistleblowers are the key to understanding the materiality of various aspects that might seem innocuous when reported on their own,” the letter states. “For this reason, a holistic approach to materiality would enable whistleblowers to be of greater assistance and enable the SEC to deter misrepresentations that are intended to obfuscate the significance of information being –– or not being –– shared.”
NWC also recommends that the SEC prioritizes international whistleblower tips. “The proposed Climate-Risk Disclosure Rules would impact public companies who conduct operations abroad,” the letter explains. “These companies often commit environmental violations in countries with weaker or nonexistent environmental regulations. Moreover, many countries lack basic whistleblower protection mechanisms making it difficult, and potentially dangerous, for whistleblowers to come forward with information regarding climate-related violations that have a financial impact.”
Lastly, NWC encourages the SEC to implement a proposed rule change to the whistleblower program’s “related action” rule. This amendment, which is widely supported by whistleblower advocates, allows the SEC to pay related action awards even when the agency that carried out the related action has its own whistleblower program.
“It is therefore critical that whistleblowers who report violations of climate disclosure rules to the SEC be eligible for rewards stemming from related enforcement actions brought by other agencies, such as EPA,” the letter states. “Doing so will provide greater incentives for whistleblowers to come forward thereby increasing the efficacy of the Climate Disclosure Rule.”