In late 2020, rumor had it that the Securities and Exchange Commission (SEC) under the Biden Administration would likely move to encourage or require more robust disclosure of environmental-social-governance (ESG) and climate-related risks.[1] Therefore, it came as no surprise when the Acting Chair of the Securities and Exchange Commission (SEC), Allison Herren Lee, released a statement on February 24, 2021, directing the SEC’s Division of Corporate Finance to focus on climate-related disclosure in public company filings.[2] Although the statement did not apply to the municipal bond market, we have observed that the SEC’s Office of Municipal Securities often follows suit after the Division of Corporate Finance releases guidance on risk disclosure matters. For example, on May 4, 2020, SEC Chairman Jay Clayton and Director of the Office of Municipal Securities Rebecca Olsen issued a statement encouraging municipal securities issuers and obligors to provide disclosure relating to the effects of COVID-19 on their finances and operations. This followed a similar statement on April 8, 2020, by the SEC Chairman and the Director of the Division of Corporation Finance regarding disclosures by public companies.[3]
In her February 24th statement, the Acting SEC Chair announced that staff would begin updating the Commission’s Guidance Regarding Disclosure Related to Climate Change, which was released on February 8, 2010 (the 2010 Guidance).[4] The 2010 Guidance did not impose specific requirements on public companies, but rather it explained how existing disclosure standards and requirements could require robust disclosure of climate change risks and effects on issuers in relevant contexts. These included, for example, information regarding (i) operating and financial effects of compliance with federal, state, and local environmental laws and regulations, including particular disclosure of material pending legal proceedings or environmental litigation, (ii) indirect consequences of regulation and climate factors on revenue and cost structures affecting the issuer, and (iii) potential physical effects of climate change on issuers, including the impact of extreme weather and hazards to coastal property from sea-level rise.
Discussions have increased in recent years about the need for more robust disclosure of climate change risks in municipal bond offering documents. On December 6, 2018, the SEC hosted an inaugural one-day conference on municipal disclosure.[5] One of the “emerging issues” discussed at the conference was that issuers should consider providing specific disclosure about climate change risks, especially if they have commissioned studies that help analyze the costs of addressing these issues.[6] In 2019, BlackRock warned that, within a decade, issuers of more than 15% in aggregate market value of the current S&P National Municipal Bond Index could face average annualized economic losses of up to 0.5% to 1% from climate-related causes (especially extreme weather events).[7] Therefore, in most municipal bond issues, disclosure of climate risks may be necessary to provide investors all material information and, thereby, satisfy the issuer’s obligations under the federal securities laws.
Issuer personnel and bond lawyers have increasingly concluded that issuers should include specific climate change disclosures in offering documents. For example, Miami-Dade has begun including an “assessment of infrastructure vulnerability” in its offering documents.[8] Similarly, Virginia Beach includes a floodplains map in its official statements, along with a narrative warning of sea-level rise risks.[9]
The municipal bond lawyers at Butler Snow are monitoring this issue closely. Our advice generally adheres to the approach of the 2010 Guidance, which requires disclosure of climate change risk if there are concrete factors relevant to the issuer’s specific revenue base and cost structure. Generic, boilerplate language about remote future risks of climate change is less valuable than a specific weighing of relevant impacts.
[1] See https://www.complianceweek.com/regulatory-policy/bidens-sec-set-to-require-disclosure-of-esg-climate-change-risk/29788.article.
[2] See https://www.sec.gov/news/public-statement/lee-statement-review-climate-related-disclosure.
[3] See https://www.sec.gov/news/public-statement/statement-clayton-olsen-2020-05-04.
[4] See https://www.sec.gov/rules/interp/2010/33-9106.pdf.
[5] See https://www.jdsupra.com/legalnews/sec-municipal-securities-conference-51410/.
[6] See id.
[7] See https://www.blackrock.com/us/individual/literature/whitepaper/bii-physical-climate-risks-april-2019.pdf.
[8] See, e.g., https://www.barrons.com/articles/muni-bonds-face-climate-change-and-investors-are-ignoring-the-risks-51569010788.
[9] See https://emma.msrb.org/P11429848-P11109326-P11519031.pdf.
