By Caio Borges and Viviane Prado

In the first week of December 2019, the first chapter ended of a case that had become emblematic with respect to the duty of information of the administrators of private companies regarding the financial risks associated with climate change. The US Justice denied , in a first instance decision, an action filed by the Office of the Attorney General of the State of New York against the giant oil and gas company, Exxon Mobil.

As a central issue, the case had the allegation of fraud against investors and the provision of misleading information by Exxon Mobil, from the conclusions of the administrative enquiry that investigated the possible existence of ‘double accounting’ in the projections about the carbon pricing to be absorbed by the company.

The possible increase of the cost would have been as a result of taxes on carbon and other regulatory impositions for the transition to a low carbon economy that, as a whole, would have had the power to reduce the demand for non-renewable energy sources or raise the price of the extraction of fossil fuels in existing and future projects.

As a basis for the central argument of the action, the New York Office of the Attorney General compared confidential information obtained during the case with public information that the company had released between 2013 and 2016. This timeline was precisely when Exxon Mobil, under pressure from investors and shareholders, came to publish a series of analyses and projections about the impact of climate change on the profitability of its business and on the energy market as a whole. The plaintiff argued that there were inconsistencies in the information that were capable of characterizing fraud and other crimes.

The Office of the Attorney General had an extensive legal margin in order to obtain an accountability of the defendant. This is because since the Martin law , of the state of New York, enacted in 1921, it is not necessary to demonstrate intent or a deliberate intention to deceive or to defraud investors, but only the disclosure of information in disagreement with the legal parameters. However, Judge Barry Ostrager understood that that the infringement to the state and federal law had not been proven, in the form and in the content of the information made public with respect to the past, present and future climate risks, and their respective impacts on the financial return of the securities of the company.

As can be seen, the paradigmatic case of New York vs. Exxon Mobil elicits the emerging debate about the existence and the boundaries of a possible legal obligation of companies and their administrators to consider – and then to disclose to the participants of the stock markets – the financial impacts resulting from climate change on the business. This is a new perspective, which differs from that already known obligation to disclose information of any contingency of environmental liabilities.

On the international level, although in some regions and jurisdictions, such as in the European Union, Canada, Australia and the United Kingdom , regulatory agencies have recently adopted guidelines to help companies and financial institutions in the disclosure of risks related to climate change, in most countries there are still no binding rules regarding the duty to inform the agents of the stock markets about these risks.

Faced with the absence of legal or explicit regulatory provisions, judicial actions such as the one exemplified in New York could become more frequent and dictate the legal parameters that should be taken into consideration by the administrators in the preparation and disclosure of information about the impacts of climate change on their organizations.

What, then, are some of the parameters that can be taken from the case under examination and others that are applicable to the Brazilian reality?

In Brazil, according to company law (Law 6404/1976) and stock market law (Law 6385/1976), as well as the regulation of the Brazilian Securities Commission (CVM), it is the responsibility of the issuers of securities and their administrators to disclose all the information that may have an impact on the investment decision or on the exercise of rights, such as the right to supervise the management of the business, to vote, or to file actions seeking compensation for losses.

In the practice of the publicly held companies, relevant information about the economic and financial performance and the progress of the corporate activities are disclosed by different means and in varied formats.

The balance sheets and the financial statements express the state of the accounting records of the company and provide analyses by the independent auditor and the management about the financial situation of the company. The annual reports, including the sustainability reports, normally go beyond the purely financial documents and present a report of actions and even of the strategic direction of the company, as well as the numbers that express the performance of the business from the perspective of the social, economic and environmental impact.

The forms submitted to the CVM and other national and foreign regulatory agencies provide a comprehensive view about the financial, managerial, operational and governance issues. The conferences with investors and the media allow for direct dialogue with members of the senior management and are opportune moments for these to disclose more elements of their strategic vision for the company, and to clarify specific questions. Finally, the disclosure of material facts and acts is the appropriate means to immediately inform the market about events that have a possible impact on the price of the securities of the company and on the exercise of the rights by the investors.

Returning to the case of New York vs. Exxon Mobil, one lesson that can be learned is precisely that each means of disclosure, as well as each type of information, will be evaluated both individually, and as a whole, in the event of a company being questioned by a judicial or administrative authority with respect to compliance with the duty to inform investors and shareholders about climate risk and its repercussions on the current and future financial health of the company.

In fact, in order to make his findings, the US judge evaluated a series of public documents of the company, such as the socio-environmental reports, statements, balance sheets and financial statements, and even studies conducted by the defendant about the future of the energy market in the context of the regulatory measures for the transition to a low carbon economy.

One other aspect to be highlighted from the aforementioned case is that, as well as proving that there was no omission or deliberate intention to deceive the investors and shareholders, the companies and their administrators could also be put to the test with respect to the quality, the truthfulness and the integrity of the information made public about the management of the climate risks.

This applies both for extensive projections about the future behavior of the climate, exercises to anticipate the effects of future scenarios of regulatory measures with respect to the specific sector in which the company operates, as well as evaluations that relate the specific impact of climate change on the corporate operations and strategies. The US case shows that the rigor and diligence employed in all of these situations should be high although, in this latter case, there were additional implications because the contextualized analyses transposed the global phenomenon to the specific business reality.

In this regard, despite once again the absence in countries such as Brazil of a state regulatory standard that explicitly imposes the disclosure of information about climate risks on issuers and administrators, the market itself is progressively heading towards the readjustment of policies and practices with respect to the availability of information about the impacts of climate change on the present and future business.

Part of this evolution has arisen with the movement of institutional investors to enable selection by sustainable investment and to operate collaboratively in the stewardship of the invested companies. “Climate Action 100+” is an example of investor initiative, whose members undertake to comply with their fiduciary duties against the beneficiaries, such as clients of fund managers, and members of funds and pensioners. This implies, among other different actions, work with the invested companies in order to improve the disclosure of information about climate risks. Over 370 investors, totaling USD 35 trillion in assets under management, have joined the initiative.

Launched in October 2019, the platform “Investors for the Climate” is another example of the mobilization of investors in this subject, this time domestically. The initiative has an objective to engage and persuade professional investors in Brazil to proceed with the decarbonization of their portfolios.

Sectoral or focused initiatives such as those exemplified above are, in most cases, divisions or attempts to create frameworks aligned with the recommendations of the Task Force on Climate-Related Financial Disclosures, or “TCFD “). The TCFD, led by the industry, was established under the auspices of the G-20 in 2015 and, after two years of work, presented the global mark of reference on the disclosure of climate risks. It contains principles and recommendations for the improvement of the financial disclosure related to climate for the various sectors and industries.

In the light of the seven principles outlined by the TCFD on the disclosure of information refering to climate risks , companies and financial institutions must make available qualitative and quantitative information that complies with a series of requirements. Among other qualifications, the information made public must be consistent, relevant, specific, complete, clear, balanced, understandable, reliable, verifiable, and objective and carried out in the appropriate manner and time.

It is fundamental to remember that the duty to inform coexists with other duties, including fiduciary duties, risk management and the good management of the business.

The disclosure of information is necessary so that interested parties can better understand the internal decision-making process and so that they can assess whether all the relevant elements were taken into account in the taking of a business decision. Although the legal framework and the precedents of the CVM recognize that it is the responsibility of the administrators to evaluate the existence or otherwise of a material fact or act to be disclosed and the time of the disclosure, the perception is increasing that no business is oblivious to the impacts of climate change and that, therefore, there is the duty to address the issue in the information that is disclosed by the company.

Because the climate emergency is worsening, with extreme phenomena occurring with greater frequency and severity, and in view of the start of the implementation of the Paris Agreement in 2020, the corporate actors will become increasingly called upon socially and legally compelled to demonstrate, through actions and information, the measures that they are taking to identify and act on the risks that climate change brings to their business.

This text was originally published on the JOTA site, in January 13, 2020.

CAIO BORGES – coordinator of the Law and Climate Program of the Institute for Climate and Society (iCS), with a master’s degree in law and development at the Getúlio Vargas Foundation, and a doctorate in law from the University of São Paulo.
VIVIANE MULLER PRADO – professor at FGV Law SP, coordinator of the Study Group on Markets and Investments of FGV Law SP, and a doctorate in law from the University of São Paulo.