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Climate x FinReg Roundup:
May 2nd

This weekly news roundup highlights noteworthy developments at the intersection of climate change and financial regulation.

Securities and Exchange Commission

On Thursday, the SEC charged Vale S.A., a Brazilian mining company that is publicly traded on the NYSE, with securities fraud, alleging that Vale “misled local governments, communities, and investors with its environmental, social and governance (ESG) disclosures.” Specifically, Vale is accused of making false and misleading statements about the safety of its dams ahead of the 2019 Brumadinho dam collapse that killed 270 people.

  • The SEC’s complaint alleges that, “for years, Vale knew that the Brumadinho dam, which was built to contain potentially toxic byproducts from mining operations, did not meet internationally-recognized standards for dam safety.”

  • Grubir S. Grewal, Director of the SEC’s Division of Enforcement, released the following statement: “Many investors rely on ESG disclosures like those contained in Vale’s annual sustainability reports and other public filings to make informed investment decisions. By allegedly manipulating those disclosures, Vale compounded the social and environmental harm caused by the Brumadinho dam’s tragic collapse and undermined investors’ ability to evaluate the risks posed by Vale’s securities.”

  • The investigation and complaint are indicative of an increased willingness by the SEC to crack down on public companies that may be engaged in greenwashing.

Corporate Governance

The 2022 proxy season is shaping up to be a record-breaking year for shareholder climate proposals. According to the sustainability nonprofit Ceres, “investors have filed a record 215 climate-related shareholder resolutions this year.” According to the editors of Proxy Preview 2022, climate change sits at the “top of the proxy season agenda this year and is the biggest single topic.”

  • The two most common types of shareholder resolution consist of: (1) shareholders asking companies to set GHG emissions targets or report progress on existing targets, and (2) requests for companies to disclose their climate lobbying activity.

  • Although a record-breaking number of shareholder resolutions have reached a proxy vote, many have not succeeded: in the past week, shareholders at Citigroup, Wells Fargo, Bank of America, and Goldman Sachs all voted against resolutions that recommended halting any additional financing for fossil fuel projects.

  • However, climate-conscious shareholders have managed to extract agreements from a number of firms, with companies promising to meet some demands in exchange for a withdrawal of the proposal. The Office of the New York State Comptroller has used this approach to extract promises from several corporations to set more aggressive emissions reduction targets. Ceres estimates that “Of these [215] proposals, shareholders have already negotiated agreements on 103 of them.”

  • Some climate-related resolutions have also won resounding majorities. For example, at Costco, 69.9% of votes cast supported a resolution calling for the adoption of science-based greenhouse gas emissions reduction targets covering the firm’s entire supply chain. Another resolution calling for a comprehensive sustainable packaging policy at Jack-in-the-Box passed with 95% of the vote, despite opposition from management.

Climate Damages

S&P Global has released a new study of climate impacts across 135 countries that reveals the disproportionate harm of climate change on developing economies: “In a baseline scenario where governments largely shy away from major new climate change policies – known as ‘RCP 4.5’ by scientists – lower and lower-middle income countries are likely to see 3.6 times greater gross domestic product losses on average than richer ones.”

  • “Bangladesh, India, Pakistan, and Sri Lanka’s exposures to wildfires, floods, major storms and also water shortages mean South Asia has 10%-18% of GDP at risk, roughly treble that of North America and 10 times more than the least-affected region, Europe.”

  • Costs of climate change are already increasing for most countries around the world. “Over the past 10 years, storms, wildfires, and floods alone have caused losses of around 0.3% of GDP per year globally according to insurance firm Swiss Re.” By 2050, S&P Global estimates that 4% of total global economic output could be lost to climate change.

Other Items of Interest

On Friday, the Financial Stability Board published a new report titled “Supervisory and Regulatory Approaches to Climate-related Risks.” The report summarizes current regulatory approaches to climate-related risks, and makes five recommendations for authorities and standard-setters to consider.

  • Specifically, the report suggests that authorities should:
    (1) “accelerate the identification of their information needs for supervisory and regulatory purposes to address climate-related risks”;
    (2) establish “supervisory oversight on financial institutions’ governance, processes, and controls on climate-related data reported,” including third-party verification;
    (3) “consider using common definitions” for physical, transition, and liability risk;
    (4) “move to higher reporting standards and/or mandatory reporting requirements” as the availability and quality of data improves; and
    (5) “work towards common regulatory reporting requirements” as part of a larger project of global coordination and cooperation.

On Friday, the Treasury of the United Kingdom launched the UK Transition Plan Taskforce, which will “develop measures to tackle greenwashing and support UK companies in their plans to transition to net-zero carbon emissions.”

  • The TPT will be tasked with developing a “Transition Plan Disclosure Framework” that UK publicly traded companies will be required to follow. Additionally, the TPT will design “Transition Plan Templates” that are sector-specific.