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. If the rule changes are adopted, the SEC, which has a highly successful whistleblower program, would likely see an uptick in climate whistleblowers.
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.
If the 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.
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.
Since issuing its first award in 2012, the SEC has awarded approximately $1.2 billion to 254 individuals. Chair Gensler stated that the program “helps us be better cops on the beat, execute our mission, and protect investors from misconduct.”
In March 2021, the SEC announced it was requesting public input on the agency’s handling of climate change disclosures. In response, a number of advocacy groups, including the National Whistleblower Center (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.
In their letter, NWC explains that whistleblowers are key in exposing inconsistencies in companies’ public disclosures about climate risks. However, according to NWC, whistleblowers are hesitant to come forward due to the lack of “strong and effective substantive rules prohibiting misleading corporate statements concerning climate and environmental commitments.” Without strong rules clearly outlining violations, NWC argues, whistleblowers cannot be expected to risk their careers to expose potential violations.
“Why would a whistleblower risk his or her career to report misleading statements without also knowing that such misleading statement, if proven, would constitute a violation of a law, rule, or regulation covered under the Dodd-Frank Act whistleblower Law?” the letter states. “For this reason, NWC requests that the Commission act expeditiously to propose, adopt, implement, and enforce detailed disclosure requirements for all issuers. Furthermore, we request that in adopting such rules the SEC makes clear that the Commission will also ensure that whistleblowers are properly incentivized to report these violations.”
In an article for The National Law Review entitled “Mandatory ESG Disclosures Open Door for Whistleblowers Who Aim to Help Public Good,” legal intern Grace Schepis of the whistleblower law firm Kohn, Kohn & Colapinto echoes the arguments NWC puts forth in its letter to the SEC. “Under clear mandatory reporting guidelines, violations would be more apparent and reportable,” Schepis writes. “This clarity would then enable those ready to blow the whistle to file actionable Tips to the SEC, mobilizing whistleblowers to effectively assist SEC enforcement operations, saving the agency resources and reaping major benefits for investors and the American public – as the SEC whistleblower program has already done in so many other areas of corporate compliance.”
The SEC’s proposed rules are now in a public comment period.