Climate-Related Risks: SEC Has Taken Steps to Clarify Disclosure Requirements

Impacts from a changing climate can pose serious risks to the global economy and affect many economic sectors, according to reports. Public companies are generally required to disclose certain risks in their SEC filings. In 2010, SEC issued guidance to clarify how existing disclosure requirements apply for climate-related matters.

GAO was asked to review (1) steps SEC has taken to clarify to companies their disclosure requirements for climate-related risks, (2) steps SEC has taken to examine changes companies may have made to their climate-related disclosures since the release of its 2010 Guidance, and (3) constraints SEC faces when reviewing climate-related disclosures and stakeholders' views of those disclosures.

GAO reviewed SEC's disclosure requirements, guidance, and reports on changes in climate-related disclosures; queried SEC's filings system to identify comment letters with issues on climate-related disclosures; identified examples of climate-related disclosures in companies' filings; and interviewed SEC staff and representatives of stakeholder groups, such as industry associations from five industry groups, and nonprofit organizations that work with investors. We selected these stakeholders because they either were from industries likely to be affected by climate change-related matters due to the nature of their operations, or have a key interest in climate-related issues.

Senior staff from SEC's Division of Corporation Finance generally agreed with GAO's findings.

To help clarify to companies their disclosure requirements for climate-related matters, the Securities and Exchange Commission (SEC) issued the Commission Guidance Regarding Disclosure Related to Climate Change in 2010 (2010 Guidance). The 2010 Guidance was SEC's primary form of communication to clarify companies' climate-related disclosure requirements. In addition, SEC issued individual comment letters to specific companies on their climate-related disclosures. These letters are publicly available and companies can view these letters to understand SEC's assessment of a particular company's disclosures. Representatives from industry associations with whom GAO spoke stated that they consider the disclosure requirements for climate-related risks to be clear and have no need for additional guidance.

SEC issued two reports to Congress in 2012 and 2014 that examined changes in climate-related disclosures in select industries. SEC found that most of these filings included some level of climate-related disclosures and reported that there were no notable year-to-year changes. SEC staff also continue to periodically assess climate-related disclosures in addition to its regular disclosure review process. Additionally, in April 2016, SEC requested public input on modernizing certain business and financial disclosure requirements, including potential changes on reporting climate-related risks in SEC's filings. As of December 2017, SEC staff said they are considering recommendations for the Commission's consideration based on comments received.

SEC faces constraints in reviewing climate-related and other disclosures because it primarily relies on information that companies provide. SEC senior staff explained that SEC's Division of Corporation Finance staff assess companies' filings for compliance with federal securities laws—which require companies to disclose material risks—but do not have the authority to subpoena additional information from companies. Additionally, companies may report similar climate-related disclosures in different sections of the filings, and climate-related disclosures in some filings contain disclosures using generic language, not tailored to the company, and do not include quantitative metrics. When companies report climate-related disclosures in varying formats and specificity, SEC reviewers and investors may find it difficult to compare and analyze related disclosures across companies' filings. SEC has tools, mechanisms, and resources—including internal supervisory controls, regulations and guidance, a two-level filing review process, internal and external data, and staff training and experience—that help SEC staff consistently review filing disclosures, according to SEC documents and staff. Representatives of industry associations told GAO that they consider the current climate-related disclosure requirements adequate and no additional climate-related disclosures are needed. However, some investor groups and asset management firms have highlighted the need for companies to disclose more climate-related information. But, members of SEC's Investor Advisory Committee told GAO that investors have not agreed on the priority of climate-related disclosures. Also, additional disclosure requirements or increased scrutiny of companies' climate-related information—which, if necessary, SEC and Congress can consider—could have mission and resource implications for SEC's Division of Corporation Finance.

Impacts from a changing climate can pose serious risks to the global  economy and affect many economic sectors, according to reports. For  example, as observed by the United States Global Change Research  Program, U.S. energy facilities and systems, especially those located in  coastal areas, are vulnerable to extreme weather events. Wind and  storm surge damage by hurricanes already causes significant  infrastructure losses on the Gulf Coast. The impacts and costs of floods,  droughts, and other weather events will increase in significance as what  are considered “rare” events become more common and intense.   Superstorm Sandy in 2012, for example, cost the United States an  estimated $70 billion in direct damages and lost economic output. In the  first 6 months of 2017, the United States had 10 weather and climate  disasters with losses reaching or exceeding $1 billion each. More  recently, in August and September 2017, Hurricanes Harvey, Irma, and  Maria caused significant damage to parts of the United States, and, as of  October 3, 2017, the Federal Emergency Management Agency has  approved over $1 billion in assistance funds in response to these three  hurricanes.

In February 2013, we recognized that climate change presents a  significant financial risk to the federal government and added the area of  limiting the federal government’s fiscal exposure by better managing  climate change risks as a high-risk area. In the February 2015 and 2017  updates to our high risk list, we recognized that climate change also  poses risks to private-sector decision makers such as public companies,  and these decision makers can also drive federal climate-related fiscal  exposures because they are responsible for planning, constructing, and  maintaining certain types of vulnerable infrastructure paid for with federal  funds, insured by federal programs, or eligible for federal disaster  assistance.

Public companies are generally required to disclose, among other things,  known trends, events, and uncertainties that are reasonably likely to have  a material effect on the company’s financial condition or operating  performance through annual and other periodic filings with the Securities  and Exchange Commission (SEC). These disclosures may include  information on climate-related risks. In February 2010, SEC issued  Commission Guidance Regarding Disclosure Related to Climate Change  (hereafter referred to as the 2010 Guidance) to provide guidance to  companies on how existing disclosure requirements apply for climate- related matters. We reported in 2016 that SEC considers climate-related  information as part of its routine filing review process. Furthermore,  SEC’s Office of Inspector General (OIG) examined SEC’s process for  comment letters issued to individual companies on issues identified  through the filing review and reported in September 2017 that SEC’s  Division of Corporation Finance’s (Corporation Finance) controls over its  comment letter process are generally effective.

You asked us to review SEC’s efforts to implement its 2010 Guidance.  This report examines: (1) steps SEC has taken to help companies  understand disclosure requirements for climate-related risks, (2) steps  SEC has taken to examine changes companies may have made to their  climate-related disclosures since the release of its 2010 Guidance, and  (3) constraints SEC faces when reviewing climate-related disclosures and  stakeholders’ views of those disclosures.

To address all three objectives, we reviewed SEC documents, including  the 2010 Guidance and internal filing review guidance, related to  companies’ annual filings. We also reviewed SEC’s 2012 and 2014  congressional reports and additional information on SEC staff’s ongoing  reviews of climate-related disclosures. In addition, we reviewed prior  GAO and SEC OIG reports related to the 2010 Guidance and SEC’s filing  review process, and reports from stakeholders, including the report on  recommendations from the Financial Stability Board Task Force on  Climate-related Financial Disclosures (FSB Task Force). We selected  five industries to focus on for this report: oil and gas, mining, insurance,  electric and gas utilities, and food and beverage. We selected these  industries because they were generally identified by SEC staff as more  likely than other industries to be affected by climate change-related  matters due to the nature of their operations or because we identified  companies in the industry that have submitted climate-related disclosures  and can provide perspectives on these disclosures. Views from the  selected industries are not generalizable to other industries we did not  include in our review.

To address the first objective, we determined the number of comment  letters SEC issued to companies on climate-related disclosures from  February 2, 2010, through August 11, 2017. We reviewed all these  comment letters to understand the climate-related disclosure issues SEC  staff has identified. We also interviewed SEC senior staff from the  Division of Corporation Finance and representatives from a  nongeneralizable sample of industry groups representing companies in  the five industries we selected. Views from these industry representatives  cannot be generalized to those we did not include in our review.

To address the second objective, we reviewed SEC’s April 2016 Concept  Release related to business and financial disclosures in Regulation S-K.  Further, we interviewed SEC senior staff to understand steps SEC has  taken to examine changes in climate-related disclosures since the 2010  Guidance and planned actions related to the April 2016 Concept Release.

To address the third objective, we reviewed information on the New York  State Attorney General’s investigation of and agreement with Peabody  Energy on the company’s SEC climate-related disclosures. To identify  illustrative examples of climate-related disclosures, we used Ceres’ SEC  Sustainability Disclosure Search Tool to search annual filings of S&P 500  Index companies, filed in 2016, in the five industries we selected.  Additionally, we reviewed comments on SEC’s Concept Release  submitted by organizations that represent investors, companies in the five  industries we selected, or organizations that have a key interest in  climate-related issues. We interviewed SEC senior staff to obtain  information on SEC’s filing reviews and enforcement authority. We also  interviewed representatives from the organizations representing investors  or focusing on climate-related issues. Views from the representatives of  these investor groups cannot be generalized to those we did not include  in our review.

Throughout this report, we use certain qualifiers when describing results  from interview participants, such as “few,” “some,” and “most.” We define  few as two or three; some as four or more but less than most; and most  as more than half or nearly all relative to the total number possible. The  views of interviewees we selected cannot be generalized to all SEC staff  or stakeholders on issues related to climate-related disclosures. See  appendix I for more information on our scope and methodology.

We conducted this performance audit from November 2016 to February  2018 in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for  our findings and conclusions based on our audit objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives.

SEC’s mission is to protect investors; maintain fair, orderly, and efficient  markets; and facilitate capital formation. As part of SEC’s strategic plan,  SEC strives to promote a securities market that is worthy of the public’s  trust and is characterized by, among other things, transparent disclosure  to investors of the risks of particular investments.

SEC is headed by a five-member Commission composed of the Chair  and four Commissioners. SEC’s responsibilities are divided among five  divisions and 24 offices, including the following offices that are  responsible for filing review or investor outreach:

Corporation Finance is responsible for reviewing documents that  publicly-held companies are required to file with SEC, which may  include climate-related disclosures. Corporation Finance reviews  disclosure documents that companies are required to file, including  annual reports. Corporation Finance performs its filing review  responsibilities through accounting and legal staff in 11 offices,  organized by industry. The division’s staff also provides companies  with assistance interpreting the Commission’s rules and assists the  Commission with rule making.

The Investor Advisory Committee was established under the 2010  Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd- Frank Act) to advise the Commission on regulatory priorities, the  effectiveness of disclosure, and initiatives to protect investor interests  and to promote investor confidence, among other things. The  committee has the authority to submit findings and recommendations  for review and consideration by the Commission.

The Office of the Investor Advocate was established in 2014 pursuant  to the Dodd-Frank Act to provide a voice for investors, assist retail  investors, study investor behavior, and support the Investor Advisory  Committee. The Investor Advocate is required to submit reports  directly to Congress, without any prior review or comment from the  Commissioners or SEC staff.

SEC Disclosure Requirements, Rule Making, and Guidance

SEC rules generally require public companies to disclose, among other  things, known trends, events, and uncertainties that are reasonably likely  to have a material effect on the company’s financial condition or operating  performance through annual and other periodic filings. Information is  material if there is a substantial likelihood that a reasonable investor  would consider it important in making an investment decision.  Regulation S-K, promulgated by SEC, contains disclosure requirements  that are applicable to the nonfinancial statement portion of annual filings  and other periodic reports filed with SEC.

The Commission occasionally provides guidance on topics of general  interest to the business and investment communities by issuing  interpretive releases, which publish the Commission’s views and interpret  federal securities laws and SEC regulations. The 2010 Guidance was  published by the Commission to provide guidance to companies on how  existing disclosure requirements apply for climate-related matters.

The 2010 Guidance identifies four items in Regulation S-K that may be  most likely to require climate-related disclosure in companies’ annual  filings. The four items are as follows:

Description of business. This section of a company’s annual filing  requires a description of the company’s business, including its main  products and services, and what markets it operates in. This item  expressly requires disclosure of certain material effects of complying  with environmental laws.

Legal proceedings. This section requires a company to include  information about certain material pending legal proceedings,  including, in certain circumstances, those arising under any federal,  state, or local provisions that have been enacted or adopted  regulating the discharge of materials into the environment or primarily  for the purpose of protecting the environment.

Risk factors. This section discusses the most significant factors that  make investment in the company speculative or risky. Disclosure  under this section should clearly state risks and specify how each risk  affects the particular company and should not present risks that could  apply to any company.

Management’s discussion and analysis. This section presents  management’s perspective on material past and anticipated future  business results. The information provided in this section is intended  to give the investor an opportunity to look at the company through the  eyes of management by providing both a short- and long-term  analysis of the company’s financial condition. Additionally, in this  section companies must identify and disclose known trends, events,  demands, commitments, and uncertainties that are reasonably likely  to have a material effect on their financial condition or operating  performance.

The 2010 Guidance also identifies four different topics under which  climate-related risks can be categorized (see table 1). Regardless of  whether a company’s identified risk falls under one of these categories,  companies need to disclose the information required by the federal  securities laws and regulations, and any additional material information  necessary to make the required statements, in light of the circumstances  under which they are made, not misleading.

Additionally, SEC staff may issue guidance that includes a summary or  explanation of rules adopted or amended by the Commission. For  example, SEC staff issued a Staff Accounting Bulletin on materiality that  provides guidance in applying quantitative materiality thresholds to the  preparation of financial statements filed with SEC. According to SEC, staff  guidance is not a substitute for any rule, and only the rule itself can  provide complete and definitive information on its requirements.

The Commission can adopt new rules through the rule-making process.  According to SEC, rule making can involve several steps: concept  release, rule proposal, and rule adoption.

Concept release. The Commission at times issues a concept release  to seek public input to help identify the appropriate regulatory  approach, if any, prior to issuing a rule proposal. In a concept release,  SEC describes the area of interest and the Commission’s concerns;  identifies different approaches to address the problem; and includes a  series of questions that seek the views of the public on the issue.

Rule proposal. The Commission publishes a detailed formal rule  proposal for public comment. A rule proposal advances specific  objectives and methods for achieving them. The Commission typically  provides between 30 and 90 days for public review and comment.  Public comment is considered vital to the formulation of a final rule.

Rule adoption. The Commissioners consider what they have learned  from public input on the rule proposal and seek to agree on the  specifics of a final rule. If a final rule is adopted by the Commission, it  becomes part of the official rules that govern the securities industry.

SEC’s Annual Filing and Disclosure Review Process

According to SEC senior staff, SEC reviewers examine climate-related  disclosures as part of their review of all disclosures included in the  companies’ annual filings. Corporation Finance selects annual filings for  review and determines the extent to which annual filings are reviewed  based on the requirements of the Sarbanes-Oxley Act of 2002 and review  goals established by senior leadership (see fig. 1). The Sarbanes-Oxley  Act requires SEC to review the financial statements of each reporting  company at least once every 3 years. According to SEC senior staff, SEC  staff review the financial statements of a significant number of companies  more frequently. SEC staff may also review companies’ nonfinancial  disclosures, which may be reviewed as (a) a part of a full cover-to-cover  review or (b) a targeted issue review. SEC reviewed the disclosures of  approximately 4,400 companies each in fiscal years 2015 and 2016 and  approximately 4,200 companies in fiscal year 2017. Of the reviews in  fiscal years 2016 and 2017, over 1,400 and 1,250 resulted in comment  letters, respectively.

Corporation Finance generally conducts two levels of review at key steps  in the filing review process. Once selected for review, a filing enters the  review cycle, which generally includes evaluating the disclosure for  material compliance with securities laws, preparation and review of  comments, review of company responses to comments, and public  posting of filing review correspondence on the SEC website. For most  filings, a second-level review is required during each of these phases.

According to some SEC staff, as part of SEC’s filing reviews, SEC staff  focus on the company’s filing for the current year and can supplement the  review with information from the company’s prior years’ filings, filings of  other companies in the same industry, SEC’s prior filing review reports,  and other external data outside of the filings, including companies’  sustainability and earning reports and financial analyst reports.  Companies may voluntarily disclose climate-related risks through  channels outside of SEC filings, including nongovernmental  organizations, company websites, and in response to reporting  requirements in foreign countries.

As part of the review process, SEC staff may issue “comment letters” to  companies to obtain additional information, clarification on the companies’  disclosures, or elicit better compliance with applicable requirements. In a  review of Corporation Finance’s comment letter process, SEC’s OIG  reported in September 2017 that Corporation Finance has established  policies, procedures, and internal controls that provide overall guidance  for how staff should conduct disclosure reviews and for how information,  including comments, should be documented, tracked, and disseminated  to companies and the public. However, the report also found, among  other things, that SEC reviewers (1) did not always properly document  comments before issuing comment letters to companies and (2)  inconsistently documented oral comments to companies. The report  recommended that Corporation Finance establish mechanisms or  controls and provide detailed guidance to staff to improve documentation  in the comment letter process. SEC management agreed with these  recommendations.

Furthermore, if SEC reviewers find a material inadequacy in a company’s  disclosures, the reviewers may refer the potential violations to the  Division of Enforcement for investigation. If the Division of Enforcement  finds sufficient evidence of a potential violation, SEC may file an action in  federal district court or institute an administrative proceeding.

Corporation Finance maintains four distinct electronic databases to track,  document, and report on different aspects of its filing review program.  One of these is Electronic Data Gathering, Analysis, and Retrieval  (EDGAR), which is Corporation Finance’s primary record-keeping system  of documents related to filing reviews, including companies’ filings, SEC’s  comment letters to companies and their responses to the letters, and  SEC staff’s filing review reports.

Developments Associated with Climate-Related Disclosures since the 2010 Guidance

In April 2016, SEC published a Concept Release to seek public comment  on modernizing certain business and financial disclosure requirements in  Regulation S-K. The 2016 Concept Release specifically requested  comments about “Disclosure of Information Relating to Public Policy and  Sustainability Matters.” Sustainability disclosures—including topics on  climate change, resource scarcity, corporate social responsibility, and  good corporate citizenship—are often characterized broadly as  environmental, social, or governance concerns. The public comment  period for the Concept Release ended on July 21, 2016. According to  SEC staff, the agency received approximately 370 unique comment  letters on the Concept Release.

Since 2010, several voluntary reporting frameworks are available for  companies to use to report climate-related information, including the  following:  In June 2017, the FSB Task Force issued final recommendations for  four areas of voluntary climate-related disclosures that companies can  choose to adopt, which are applicable to organizations across sectors  and jurisdictions.

In October 2016, the Sustainability Accounting Standards Board  (SASB) developed a Climate Risk Framework that enables, among  other things, the identification of climate-related risks and the  development of metrics that help companies disclose material  sustainability information to investors.

In May 2013, the Global Reporting Initiative and CDP (formerly known  as the Carbon Disclosure Project) signed a Memorandum of  Understanding for the two organizations to work together to align  areas of their reporting frameworks. This will provide more  consistency in companies’ voluntary climate-related disclosures and  improve comparability of data for investors.

SEC Issued the 2010 Guidance and Comment Letters to Specific Companies to Clarify Climate- Related Disclosure Requirements

SEC issued the 2010 Guidance, and comment letters to specific  companies, to clarify their existing disclosure requirements as they apply  to climate-related matters. SEC staff said the issuance of the 2010  Guidance was the primary form of communication it used to clarify to  companies their climate-related disclosure requirements. However, SEC  staff also noted that companies should consider the 2010 Guidance along  with all other guidance and securities laws and regulations applicable to  their filings. In addition to publishing the 2010 Guidance, SEC staff  discussed it immediately following its release in webinars and other public  events. For example, an SEC staff member presented information on the  2010 Guidance at a panel discussion for an October 2010 webinar hosted  by the National Asian Pacific American Bar Association. Representatives  from the industry associations with whom we spoke, which represent the  five industries we selected, all agreed that the 2010 Guidance helped  clarify climate-related disclosure requirements and stated that they  consider the disclosure requirements for climate-related risks to be clear  and have no need for additional guidance.

In addition, since the release of the 2010 Guidance, SEC staff has issued  individual comment letters to specific companies on their climate-related  disclosures. For example, on September 26, 2016, SEC staff issued a  comment letter to an oil company requesting that the company expand on  its disclosures in the risk factor section of the filing to provide a more in- depth description of its climate-related compliance obligations. SEC  publishes comment letters in EDGAR, and other interested companies  can view these letters to understand SEC’s assessment of a particular  company’s disclosures. Ceres, a nonprofit organization that advocates for  climate-related disclosure, analyzed SEC’s comment letters from  February 2, 2010—the release date of the 2010 Guidance—to December  31, 2013, to determine how many were related to climate-related  disclosures. Ceres reported that SEC staff sent 25 letters relating to  climate-related disclosures to 23 companies (2 companies received two  letters as a result of back-and-forth correspondence) out of the more than  45,000 comment letters sent during this period. Using the same specific  keyword search terms—such as “climate change” and “climate  mitigation”—that were identified in the Ceres report, we found 14  comment letters to 14 companies that SEC staff issued relating to  climate-related disclosures out of the over 41,000 comment letters issued  from January 1, 2014, through August 11, 2017. These comment letters  were found during our search but may not represent all climate-related  comment letters SEC staff has issued during that time frame.

SEC Examined Climate-Related Disclosures for Reports to Congress and Issued a Concept Release Seeking Public Input on Disclosure Requirements

After the issuance of the 2010 Guidance, the Senate Committee on  Appropriations directed SEC to conduct two reviews of climate-related  disclosures in 2012 and 2014. In response, SEC staff examined climate- related disclosures of a total of 60 companies in six industries each year  in 2012 and 2014. In both reports, SEC staff focused on the business  description, risk factors, and management’s discussion and analysis  sections of companies’ filings and found that most of the filings included  some level of climate-related disclosure in one or more of these areas.  SEC staff also found that the disclosures they reviewed varied in the level  of details provided. Additionally, in the 2012 report, SEC staff reported  that they did not find any notable year-to-year changes in the disclosures  reviewed from the year before the 2010 Guidance to the year after.  According to SEC senior staff, in addition to its regular evaluation of  climate-related disclosures in individual filing reviews, SEC staff continues  to periodically assess climate-related disclosures within these industries.

SEC senior staff said they did not expect changes in companies’ climate- related disclosures as a result of the 2010 Guidance since SEC did not  adopt any new disclosure requirements. As previously mentioned, SEC  published the 2010 Guidance to provide guidance to companies on how  existing disclosure requirements apply for climate-related matters. At the  time the 2010 Guidance was issued, “cap and trade” legislation was  pending in Congress; the Environmental Protection Agency was taking  steps to regulate greenhouse gas emissions; and there were efforts to  launch an international “cap and trade” system. The 2010 Guidance in  part provided clarification on how such changes—if they took place— could be incorporated into companies’ filings. However, some of these  changes did not occur.

Through the April 2016 Concept Release related to business and financial  disclosures in Regulation S-K, SEC sought input from investors,  companies, and other interested parties on the effectiveness of its  disclosure requirements, including a request for comment on climate- related disclosures in SEC’s filings. In the April 2016 Concept Release,  SEC discussed comments previously received that both noted a growing  interest in environmental, social, or governance disclosure among  investors and recommended increased sustainability disclosure  requirements. According to SEC staff, some comments criticized the  primarily voluntary nature of current corporate sustainability reporting  outside of companies’ SEC filings. As of December 2017, SEC senior  staff said they are considering recommendations for the Commission’s  consideration based on comments received on the Concept Release.

SEC Faces Constraints in Reviewing Climate- Related Disclosures as It Primarily Relies on Information That Companies Determine Is Material

As SEC reviews climate-related and other disclosures in companies’  filings, SEC relies primarily on information that companies determine is  material. SEC may not have details of the information companies used to  support their determination of material climate-related risks. Also, this  climate-related information varies in format and specificity among  companies. SEC has tools, mechanisms, and resources to help ensure  that its staff conducts reviews consistently across filings. Stakeholders,  including investor and industry groups, have mixed views on the need for  more climate-related disclosures with additional specificity and a  consistent format for these disclosures to allow for comparison across  filings. Additional disclosure requirements or increased scrutiny of  companies’ climate-related information—which, if necessary, SEC and  Congress can consider—could have mission and resource implications  for SEC’s Division of Corporation Finance.

SEC May Not Have the Details of the Information Companies Rely on in Determining Materiality

SEC reviewers may not have access to the detailed information that  companies use to arrive at their determination of whether risks, including  climate-related risks, must be disclosed in their SEC filings. SEC’s scope  of review of companies’ disclosures under federal securities laws differs  from the scope of review that may be possible through the investigative  authority of the state attorneys general under state laws. SEC senior staff  further noted that Corporation Finance staff assess companies’ filings for  compliance with the disclosure requirements under federal securities laws  but do not have the authority to subpoena companies’ information. As  previously noted, if SEC reviewers find a material inadequacy in a  company’s disclosures, the reviewers can refer potential violations to the  Division of Enforcement for investigation. SEC senior staff stated that the  Division of Enforcement can subpoena company information only after  obtaining a formal order of investigation.

In an investigation of Peabody Energy under a New York State law, the  Attorney General of New York State subpoenaed the company’s internal  documents and found that although the company’s disclosures denied it  had the ability to reasonably predict the impact of future climate change  laws and regulations on its business, Peabody had made internal market  projections showing severe negative impacts from certain potential laws  and regulations and failed to disclose those projections to the public. As a  result of this investigation, Peabody agreed to disclose, among other  things, concerns that the environmental impacts of coal combustion are  resulting in increased regulation, which could affect demand for  Peabody’s products or services. SEC staff explained that when they  become aware of an investigation of a company, they look for and assess  disclosures related to any pending legal proceedings and the potential  impacts. SEC senior staff told us SEC staff reviewed Peabody Energy’s  filings and other publicly available information, including its climate- related disclosures, and did not issue climate-related comments in its  review of Peabody Energy’s filings; SEC has not taken any public actions  against Peabody Energy following the New York Attorney General’s  investigation. Also, SEC staff noted that the additional disclosures  Peabody Energy is asked to provide by the New York Attorney General  may not be applicable for other companies, but these disclosures may be  required if the information is material and necessary to make the  disclosures not misleading under the current federal disclosure rules.

If SEC reviewers are aware of publicly-available information outside of the  filings that is contradictory to companies’ disclosures, they can request  additional information or clarification from companies on their climate- related and other disclosures through comment letters. However, a  company possesses information necessary to determine whether  environmental regulations will have a material effect on the company’s  financial condition or results of operations and may claim that the effect of  environmental regulations raised by SEC is not material and hence does  not need further disclosure. For example, in a 2016 comment letter, SEC  staff requested that an oil company expand and clarify its discussion of  climate-related compliance with a California environmental law. The  company responded that the current costs and impact of compliance with  the state law have not been material to the company and it would seek to  more clearly disclose such information in its annual filing for the coming  year. SEC staff did not issue any further comment on this issue. SEC  senior staff told us that they determine whether further comments are  needed based on whether the company’s response is consistent with  other information the companies reported in other publicly available  documents, such as financial analyst reports or the company’s  sustainability report.

Climate-Related Disclosures Vary in Format and Specificity

Climate-related disclosures vary in format because companies may report  similar climate-related disclosures in different sections of the annual  filings. We reviewed and identified illustrative examples of climate-related  disclosures in the annual filings of 116 S&P 500 Index companies, filed  with SEC in 2016, in the five industries in our review (see app. II for  additional information). We found, for example, one beverage company  reported its goal to reduce greenhouse gas emissions in the business  description section of its filing while another beverage company reported  a similar goal on carbon footprint reduction in the risk factors section of its  filing. As previously noted, SEC reviewers may compare a company’s  disclosures to other companies’ disclosures in the same industry to  identify potential missing disclosures if other companies in the same  industry have made similar disclosures. When companies report climate- related disclosures in varying format, SEC reviewers and investors may  find it difficult to navigate through the filings to identify, compare, and  analyze the climate-related disclosures across filings, especially given the  size of each individual filing. In addition, companies’ filings may include  only a few mentions of climate-related disclosures. For instance, the  annual filings we reviewed for an insurance company, an oil company,  and a food company, respectively, were 389 pages, 117 pages, and 136  pages long. Within these filings, the corresponding number of mentions of  climate-related disclosures was 9, 13, and 6, respectively, based on our  analysis using Ceres’ SEC Sustainability Disclosure Search Tool. Given  that SEC reviewers primarily rely on information companies disclose in  filings, it may be difficult to determine whether a low level of disclosure  indicates that the company does not face any climate-related risks or  does not consider the risks to be material.

Also, climate-related disclosures in some companies’ filings use  boilerplate language, which is not specific to the company, and the  information is unquantified. Our review of the annual filings of 116 S&P  500 Index companies found that some companies’ climate-related  disclosures provided some quantitative information, while some other  companies’ disclosures listed existing environmental regulations without  specifying the associated impacts on the companies. For example, one oil  and gas company stated in its annual filing that the imposition and  enforcement of stringent greenhouse gas emissions reduction targets  could severely and adversely impact the oil and gas industry and  significantly reduce the value of the company’s business. However, the  company did not provide any quantitative information on such impacts on  its business. Additionally, SASB reported in October 2016 that its analysis  of almost 1,500 disclosures in annual filings of 637 companies in 72  industries found that almost 30 percent of the disclosures SASB reviewed  did not include any climate-related information, some contained  boilerplate language or company-tailored narratives, and less than 20  percent of these disclosures included quantitative metrics.

SEC Has Mechanisms, Tools, and Resources to Help Its Staff Consistently Review Filing Disclosures

Although SEC relies primarily on information companies provide in their  filings when reviewing climate-related and other disclosures, it has  mechanisms, tools, and resources to help its staff consistently review  filing disclosures, according to SEC documents and SEC staff we  interviewed.

Internal supervisory control testing. As we reported in 2016,  Corporation Finance’s Disclosure Standards Office (DSO) helps improve  consistency in oversight of filing reviews by conducting testing of internal  supervisory controls throughout the year. DSO is responsible for  managing Corporation Finance’s internal supervisory control and  contributes to Corporation Finance’s quality and process improvement  efforts. DSO senior staff told us that the office examined filing reviews  conducted by SEC staff on a random sample of filings in each year from  2014 through 2016. In DSO’s reviews, DSO examined the documents  that are part of the filing reviews conducted by SEC staff, including the  underlying filings, filing review reports prepared by SEC staff, comment  letters issued, and the associated responses, among other things. Also,  DSO staff assessed whether SEC staff had followed the relevant  Corporation Finance policies and procedures. For example, DSO  checked whether staff followed procedures for second-level reviews and  issuing comment letters. However, DSO senior staff said they have not  conducted any review specific to climate-related disclosures. Corporation  Finance senior staff said DSO submits the results of its testing to its  managing executive for use in the division’s management assurance  statements. We also reported in 2016 that DSO helped strengthen  components of Corporation Finance’s internal control.

Two-level review process. As discussed earlier, SEC generally  conducts two levels of review at key steps in the filing review process.  The two-level review process helps ensure that staff consistently review  disclosures across filings, according to SEC staff we interviewed. For  example, the second-level reviewers review the comment letters prepared  by the first-level reviewers before sending the letters to companies,  according to SEC’s internal policies and procedures. Also, assistant  directors and senior assistant chief accountants of the 11 Corporation  Finance offices generally meet monthly to discuss recent trends and  issues identified in filing reviews in general, which helps ensure that staff  assess materiality consistently across industries, according to some SEC  staff.

Regulations and guidance. SEC staff can consult regulations and  formal and informal SEC guidance for their filing reviews (see table 2 for  examples), according to SEC documents and staff we interviewed. SEC  posts relevant guidance and other information on its intranet site. Nearly  all SEC staff we interviewed said current guidance was sufficient to guide  their filing reviews, including the reviews of climate-related disclosures.

Internal and external data. According to SEC’s internal review guidance,  SEC staff are expected to consider internal and external data as part of  the filing review. As previously noted, some SEC staff told us they  consider information from prior filings, internal filing review reports, other  filings of companies in the same industry, and external data outside of the  filings to supplement their filing reviews. For example, SEC staff can  generally use internal and external databases to search prior years’ filings  and filing-review-related comments and correspondence with companies.  Some SEC reviewers told us that they also compare disclosures with  external information, such as companies’ voluntary sustainability reports  and financial analyst reports on companies’ earnings and operations, to  look for inconsistencies in the companies’ reporting. Although SEC  Corporation Finance staff can review external information such as the  company’s sustainability report, they do not have the underlying  information the company used to determine whether a potential  disclosure was material or prepare the sustainability report and cannot  perform an independent assessment of the disclosure based on the  materiality of the underlying information. For example, SEC staff noted in  a 2016 comment letter to an oil company that SEC has compared and  identified potential inconsistency between the company’s disclosures on  uncertainty about a new climate-related regulation and physical risks and  information in the company’s sustainability report. The company stated  the climate-related regulatory risks were not material and climate-related  risks in their filing were consistent with information in its sustainability  report. SEC did not issue any further comments.

Staff training. SEC staff have had some training on assessing materiality  and industry-specific issues but fewer training that discussed climate- related disclosures, according to SEC staff.

Training on materiality. Most SEC staff we interviewed said training  on materiality assessment was part of staff training or their ongoing  on-the-job learning in their day-to-day work. Our review of some SEC  training materials showed that training discussions covered federal  securities laws and disclosure requirements, disclosure review, and  materiality but did not focus specifically on climate-related issues.  Also, some SEC staff said they consider materiality based on a given  company’s specific facts and circumstances as they review filings in  their day-to-day work. For example, two SEC staff we interviewed  explained that second-level reviewers help first-level reviewers  understand how to apply specific facts and circumstances as they  consider materiality when they review filings.

Training on industry-specific issues. All SEC staff we interviewed  noted that industry-specific training is provided by individual assistant  director offices. For example, some staff mentioned training on  disclosures for the oil and gas industry. Other staff noted that they  also share information on industry-specific issues as part of their  communication or meetings with supervisory staff. However, SEC  staff we interviewed did not recall any industry-specific training on  climate-related disclosures offered by individual assistant director  offices.

Training on climate-related disclosures. Some SEC staff we  interviewed identified training on the 2010 Guidance when the  guidance was issued or a brownbag discussion on climate-related  disclosure issues including the Peabody Energy investigation in 2016.  According to SEC senior staff, the 2016 brownbag included a  discussion of the 2010 Guidance and was offered to all Corporation  Finance staff. In addition, our review of some meeting agendas  showed that these meetings sometimes included discussion items on  issues related to climate-related disclosures, such as the Peabody  Energy investigation and a proposed environmental regulation.  Furthermore, new SEC staff receive training on how to conduct filing  reviews in general but not specifically on climate-related disclosures,  according to some SEC staff.

Most of the SEC staff we interviewed told us they consider the training  they have received to be sufficient for conducting filing reviews.  Additionally, an SEC OIG survey of SEC staff published in September  2017 asked both first- and second-level reviewers if they felt they had  received adequate training and guidance from SEC on how to conduct a  disclosure review. Of the 159 who answered as first-level reviewers, 82  percent said that they felt they received adequate training and guidance  to conduct disclosure reviews; and of the 130 who answered as second- level reviewers, 83 percent said that they felt they received adequate  training and guidance to conduct disclosure reviews. Other staff we  interviewed also noted that they receive training through their day-to-day  work on an ongoing basis or when new regulations are issued or the need  arises.

Staff experience. All eight supervisory staff we interviewed indicated  that, as of August 2017, they had at least 10 years of experience at SEC  as filing reviewers, while the 12 nonsupervisory staff we interviewed  noted that they had from 2 to 18 years of such experience. Also, most of  the SEC staff we interviewed indicated that they had some prior  accounting or legal experience related to annual filing preparation or  review, but they did not have any direct prior experience on climate- related disclosures. However, most SEC staff we interviewed said they  generally do not need technical expertise to understand climate-related  disclosures. Some staff said they can consult mining or petroleum  engineers within Corporation Finance if the disclosures relate to other  subjects, such as oil and gas reserves.

Stakeholders Have Mixed Views on the Amount and Specificity of the Current Climate-Related Disclosures

Stakeholders, including investor and industry groups, have different views  on whether additional climate-related disclosures, including the amount  and specificity, are needed. Some asset management firms and investor  groups have highlighted the need for companies to disclose more climate- related information to help investors make more informed investment  decisions. Three large asset management firms stated that they are  committed to engaging with and encouraging companies to provide  additional climate-related disclosures. For example, in 2017, one firm  supported shareholder proposals for two companies to report the impacts  of climate change on their operations. The proposals passed with  majority shareholder support. The Council of Institutional Investors and  Ceres stated in their letters commenting on SEC’s April 2016 Concept  Release and also told us that the information on environmental risks,  including climate risks, has become more significant for investors and  companies. The two investor associations also noted that companies’  climate-related disclosures in the risk factors and management’s  discussion and analysis sections of the filings generally do not provide  investors with sufficient details. They further stated in their letters  commenting on SEC’s April 2016 Concept Release that current climate- related disclosures are generally not comparable across companies’  filings. Additionally, SASB reported that climate-related disclosures using  quantitative metrics may not be comparable because they lack  standardization.

In contrast, representatives from the five industry associations with whom  we spoke all noted that they consider the current requirements for  climate-related disclosures adequate. They also do not believe additional  climate-related disclosures are needed in SEC filings as the filings should  include only climate-related information if it is material. Additionally, some  companies are providing climate-related information through channels  outside of SEC filings. Three of these industry associations also stated in  their letters commenting on SEC’s April 2016 Concept Release that they  would like to keep the existing requirements for climate-related  disclosures.

While some investor organizations we spoke with generally believe more  climate-related disclosures are needed, investors have not reached  agreement on the priority of advocating for climate-related disclosures or  the framework for companies to use to report these disclosures. For  example, some members of a subcommittee of SEC’s Investor Advisory  Committee have identified climate-related disclosures as a priority issue,  but the subcommittee as a whole did not reach agreement that climate- related disclosures should be among its highest priorities. In addition, as  previously described, existing reporting frameworks include those  developed by CDP, Global Reporting Initiative, SASB, and the June 2017  FSB Task Force final recommendations. Given that these are voluntary  frameworks, companies can report climate-related information using any  of the frameworks or not use a framework at all. Further, stakeholders  advocating for climate-related disclosures have not agreed on whether to  adopt one of the existing reporting frameworks or develop a new  framework for companies to use in reporting climate-related disclosures.  For example, companies have not determined which of the existing  reporting frameworks to use or are uncertain on which framework is  preferred by investors for reporting climate-related disclosures, according  to one investor association, representatives of SEC’s Investor Advisory  Committee, and an SEC senior staff of the Office of Investor Advocate.

The SEC senior staff further stated that SEC may be hesitant to  recommend a particular framework for companies to use given the  uncertainties. Another organization focusing on climate-related  disclosures in its letter commenting on SEC’s April 2016 Concept  Release suggested that SEC review and consider elements of existing  reporting frameworks. Furthermore, SEC’s Investor Advisory Committee,  in its letter commenting on the Concept Release, recommended SEC  develop an analytical framework on climate-related disclosures, among  other things. Most recently in June 2017, the FSB Task Force reported  that its recommendations aim to provide a framework to help companies  more consistently disclose climate-related information and align their  reporting frameworks over time. In particular, the Task Force  recommends that companies include material climate-related disclosures  in their public filings and encourages standard-setting bodies to support  adoption of the recommendations. According to SEC senior staff, while  the Task Force recommendations may be helpful if the Commission were  to consider new rules on climate-related disclosures in the future, SEC  staff is not aware of any specific SEC actions or plans based on the  recommendations. Also, additional disclosure requirements or increased  scrutiny of companies’ climate-related information—which, if necessary,  SEC and Congress can consider—could have mission and resource  implications for SEC’s Division of Corporation Finance.

We provided a draft of this report to SEC for review and comment. In oral  comments provided on January 10, 2018, senior staff in SEC’s Division of  Corporation Finance generally agreed with our findings and provided  technical comments, which we incorporated into the report, as  appropriate.

As agreed with your offices, unless you publicly announce the contents of  this report earlier, we plan no further distribution until 30 days from the  report date. At that time, we will send copies to interested congressional  committees, the Chair of SEC, and other interested parties. In addition,  this report will be available at no charge on the GAO website at  http://www.gao.gov.

If you or your staff have any questions about this report, please contact  Michael Clements at (202) 512-8678 or clementsm@gao.gov, or J.  Alfredo Gómez at (202) 512-3841 or gomezj@gao.gov. Contact points for  our Offices of Congressional Relations and Public Affairs may be found  on the last page of this report. GAO staff who made key contributions to  this report are listed in appendix III.

Appendix I: Objectives, Scope, and Methodology

This report examines: (1) steps the Securities and Exchange Commission  (SEC) has taken to help companies understand disclosure requirements  for climate-related risks, (2) steps SEC has taken to examine changes in  climate-related disclosures since the release of its 2010 Commission  Guidance Regarding Disclosure Related to Climate Change (hereafter  referred to as the 2010 Guidance), and (3) constraints SEC faces when  reviewing climate-related disclosures and stakeholders’ views of those  disclosures.

To address all objectives, we reviewed SEC documents, including the  2010 Guidance and internal filing review guidance, related to SEC’s  review of climate-related and other disclosures in companies’ annual  filings. We also reviewed SEC’s 2012 and 2014 congressional reports,  titled Staff Report to the Senate Committee on Appropriations Regarding  Climate Change Disclosure, and additional information on SEC staff’s  ongoing reviews of climate-related disclosures. In addition, we reviewed  prior GAO and SEC Office of Inspector General reports related to the  2010 Guidance, climate-related risks, and SEC’s filing review process  and reports from stakeholders, including the report on recommendations  from the Financial Stability Board Task Force on Climate-related Financial  Disclosures (FSB Task Force).

We selected five industries to focus on for this report: oil and gas, mining,  insurance, electric and gas utilities, and food and beverage. We selected  the first four industries because they were identified by SEC staff, in its  2012 and 2014 congressional reports, as more likely than other industries  to be affected by climate change-related matters due to the nature of their  operations. We also selected the food and beverage industry because we  identified companies in this industry that have submitted climate-related  disclosures and can provide perspectives on these disclosures, and SEC  had not selected companies in this industry for review in its 2012 and  2014 congressional reports or ongoing periodic reviews of climate-related  disclosures. For all five industries, we searched companies’ annual filings  to determine whether the industries include companies that have  submitted climate-related disclosures in SEC filings or are represented by  associations that have submitted comments on SEC’s April 2016 Concept  Release related to business and financial disclosures in Regulation S-K.  Because we did not search companies’ filings of all industries, industries  we focused on in this report may not be a comprehensive list of industries  that are affected by climate-related risks and views on the selected  industries are not generalizable to other industries we did not include in  our review.

To address the first objective, we reviewed SEC’s 2010 Guidance and  Division of Corporation Finance (Corporation Finance) policies and  procedures on review of disclosures. We determined the number of  comment letters SEC issued to individual companies on climate-related  disclosures from February 2010 to August 2017. Specifically, we  reviewed a 2014 report by Ceres, a nonprofit organization that works with  investors, companies, and public interest groups on sustainable business  practices, that analyzed and determined the number of SEC comment  letters to companies from February 2, 2010 (the date the 2010 Guidance  was released) to December 31, 2013. Additionally, using the same  keyword search terms—such as “climate change” and “climate  mitigation”—that were used in the Ceres report, we determined the  number of SEC comment letters issued to individual companies on issues  related to climate-related disclosures from January 1, 2014, through  August 11, 2017. Specifically, we searched for SEC’s comment letters in  its EDGAR (Electronic Data Gathering, Analysis, and Retrieval) system— which is SEC’s record-keeping system for comment letters to companies,  among other things—using the keyword search functionality. The search  terms we used were not intended to represent a comprehensive list of  keywords that may relate to climate-related issues. Therefore, the  nongeneralizable sample of comment letters we identified is not intended  to be a comprehensive list or representative sample of comment letters  on climate-related information in SEC filings. We reviewed the comment  letters identified through our search to understand the climate-related  disclosure issues SEC staff has identified.

To understand SEC’s efforts to clarify climate-related disclosure  requirements for companies and industry groups’ views on SEC’s efforts,  we interviewed SEC staff from Corporation Finance and representatives  from a nongeneralizable sample of industry groups representing  companies in the five industries we selected. Specifically, we interviewed  representatives from the following industry groups: American Insurance  Association, American Petroleum Institute, Edison Electric Institute,  Grocery Manufacturers Association, and National Mining Association. We  selected these groups because they represent companies in the five  industries in our review and they or their members submitted letters  commenting on SEC’s April 2016 Concept Release or their members  submitted climate-related disclosures to SEC in 2016. Additionally, we  reviewed the letters these groups submitted commenting on the Concept  Release to understand their views on climate-related disclosures. Views  from the industry representatives with whom we spoke cannot be  generalized to those we did not include in our review.

To address the second objective, we reviewed SEC’s 2012 and 2014  congressional reports and additional information on ongoing periodic  reviews of climate-related disclosures. We also reviewed SEC’s April  2016 Concept Release, particularly the section that focuses on climate- related disclosures in SEC’s filings. Further, we interviewed Corporation  Finance staff to understand steps SEC has taken to assess the effect of  the 2010 Guidance and planned actions related to comments on climate- related disclosures for the Concept Release.

To address the third objective, we reviewed SEC documents on the  review of climate-related and other disclosures in companies’ filings,  including the 2010 Guidance, filing review guidance, and examples of  staff training materials. We also reviewed information related to the New  York State Attorney General’s investigation of and agreement with  Peabody Energy on the company’s climate-related disclosures in SEC  filings. To understand the specificity of companies’ climate-related  disclosures in annual filings, we reviewed the Sustainability Accounting  Standards Board’s (SASB) October 2016 report that analyzed and  categorized selected companies’ climate-related disclosures according to  their level of specificity. To identify illustrative examples of climate- related disclosures, we used Ceres’ SEC Sustainability Disclosure Search  Tool to search annual filings of S&P 500 Index companies, filed with SEC  in 2016, in the five industries we selected. We used Ceres’ SEC  Sustainability Disclosure Search Tool because it searches companies’  SEC annual filings by industry, identifies relevant climate-related  disclosures and their locations within the filings, and reproduces the  excerpts of these disclosures in a single report. In a search of Ceres’  database on September 20, 2017, we identified 116 S&P 500 Index  companies that included climate-related disclosures in their annual filings  filed in 2016. See appendix II for examples of disclosures with varying  levels of specificity.

To obtain information on SEC staff’s review of climate-related  disclosures—including information on the review process, tools and  guidance used in the review, and staff training and experience—we  interviewed 20 Corporation Finance staff. Specifically, we interviewed 8  senior supervisory staff from the four Corporation Finance offices that  cover reviews of filings of companies in the five industries we selected.  We also randomly selected 12 nonsupervisory staff from these same four  offices, with a mix of accountants and attorneys and years of experience  at SEC. In addition, we interviewed senior staff from Corporation  Finance’s Disclosure Standards Office to obtain information on the  office’s examinations of the filing review process conducted in 2014  through 2016. Furthermore, we interviewed Corporation Finance senior  staff to obtain an understanding of SEC’s enforcement authority in its  filing review program and how that differs from the investigation power of  state attorney generals.

To understand stakeholders’ views on climate-related disclosures, we  reviewed SEC’s April 2016 Concept Release and individual letters  commenting on the Concept Release from organizations that represent  investors, companies in the five industries we selected, or organizations  that focus on climate-related issues. We also reviewed the websites and  documents of three investment management firms—BlackRock Advisors  LLC, State Street Global Advisors Limited, and Vanguard Group, Inc.—on  their efforts to seek additional climate-related disclosures from  companies. We reviewed reports by stakeholders, including SASB and  the FSB Task Force, to provide perspectives on investors’ views on the  current state of climate-related disclosures. We identified these  stakeholders because they represent major investor interests or have  submitted letters commenting on SEC’s April 2016 Concept Release.

Furthermore, we interviewed representatives from the five industry groups  we selected and other nonprofit organizations representing investors or  focusing on climate-related issues. Specifically, we interviewed  representatives from the following organizations representing investors or  focusing on climate-related issues: Center for Climate and Energy  Solutions (C2ES)—an independent, nonpartisan, nonprofit organization  that works to address climate and energy challenges; Ceres; and the  Council of Institutional Investors—a nonprofit, nonpartisan association  that represents corporate, public, and union employee benefit funds and  endowments. We selected these organizations because they represent  investors or focus on climate-related issues and have submitted letters  commenting on SEC’s April 2016 Concept Release. Views from the  representatives of investor groups with whom we spoke cannot be  generalized to those we did not include in our review. Additionally, we  interviewed SEC senior staff from the Investor Advisory Committee and  the Office of Investor Advocate and an industry representative who is a  member of the Investor Advisory Committee to obtain information on  investors’ views on climate-related disclosures. We also interviewed  Corporation Finance senior staff to understand SEC’s planned efforts, if  any, on climate-related disclosures.

Throughout this report, we use certain qualifiers when describing results  from interview participants, such as “few,” “some,” and “most.” We define  few as two or three; some as four or more but less than most; and most  as more than half or nearly all relative to the total number possible. The  views of interviewees we selected cannot be generalized to all SEC staff  or stakeholders on issues related to climate-related disclosures.

Appendix II: Examples of Climate-Related Disclosures in Securities and Exchange Commission (SEC) Form 10-K Filings

This appendix provides illustrative examples of climate-related  disclosures by two companies in the oil and gas industry. The first  example contains boilerplate and unquantified information. The second  example contains some quantitative information and metrics. Filings we  identified are not intended to be a comprehensive list or representative  sample of companies that disclose climate-related information in SEC  filings. See appendix I for additional information on the analysis.

Other Items  The amount of insurance covering physical damage to our property and liability related  to negative environmental effects resulting from a sudden and accidental pollution  event, excluding Atlantic Named Windstorm coverage for which we are self insured,  varies by asset, based on the asset’s estimated replacement value or the estimated  maximum loss.

Risk Factors  Climate change initiatives may result in significant operational changes and  expenditures, reduced demand for our products and adversely affect our business. We  recognize that climate change is a global environmental concern. Continuing political  and social attention to the issue of climate change has resulted in both existing and  pending international agreements and national, regional or local legislation and  regulatory measures to limit greenhouse gas emissions. These agreements and  measures may require significant equipment modifications, operational changes, taxes,  or purchase of emission credits to reduce emission of greenhouse gases from our  operations, which may result in substantial capital expenditures and compliance,  operating, maintenance and remediation costs. In addition, our production is used to  produce petroleum fuels, which through normal customer use may result in the  emission of greenhouse gases. Regulatory initiatives to reduce the use of these fuels  may reduce demand for crude oil and other hydrocarbons and have an adverse effect  on our sales volumes, revenues and margins. The imposition and enforcement of  stringent greenhouse gas emissions reduction targets could severely and adversely  impact the oil and gas industry and significantly reduce the value of our business.

Management’s Discussion and Analysis of Financial Condition and Results of  Operations  We recognize that climate change is a global environmental concern. We assess,  monitor and take measures to reduce our carbon footprint at existing and planned  operations. We are committed to complying with all Greenhouse Gas (GHG) emissions  mandates and the responsible management of GHG emissions at our facilities.

Risk Factors  We expect to continue to incur substantial capital expenditures and operating costs as a  result of our compliance with existing and future environmental laws and regulations.  Likewise, future environmental laws and regulations, such as limitations on greenhouse  gas emissions, may impact or limit our current business plans and reduce demand for our  products.  Our businesses are subject to numerous laws and regulations relating to the protection of  the environment. These laws and regulations continue to increase in both number and  complexity and affect our operations with respect to, among other things:  The discharge of pollutants into the environment.  Emissions into the atmosphere, such as nitrogen oxides, sulfur dioxide, mercury and  greenhouse gas emissions.

The handling, use, storage, transportation, disposal and cleanup of hazardous  materials and hazardous and nonhazardous wastes.  The dismantlement, abandonment and restoration of our properties and facilities at  the end of their useful lives.  Exploration and production activities in certain areas, such as offshore environments,  arctic fields, oil sands reservoirs and tight oil plays.

We have incurred and will continue to incur substantial capital, operating and  maintenance, and remediation expenditures as a result of these laws and regulations. To  the extent these expenditures, as with all costs, are not ultimately reflected in the prices  of our products and services, our business, financial condition, results of operations and  cash flows in future periods could be materially adversely affected.  Although our business operations are designed and operated to accommodate expected  climatic conditions, to the extent there are significant changes in the Earth’s climate, such  as more severe or frequent weather conditions in the markets we serve or the areas  where our assets reside, we could incur increased expenses, our operations could be  materially impacted, and demand for our products could fall. Demand for our products  may also be adversely affected by conservation plans and efforts undertaken in response  to global climate change, including plans developed in connection with the recent Paris  climate conference in December 2015. Many governments also provide, or may in the  future provide, tax advantages and other subsidies to support the use and development  of alternative energy technologies.

Management’s Discussion and Analysis of Financial Condition and Results of  Operations  Climate Change  There has been a broad range of proposed or promulgated state, national and  international laws focusing on greenhouse gas (GHG) reduction. These proposed or  promulgated laws apply or could apply in countries where we have interests or may have  interests in the future. Laws in this field continue to evolve, and while it is not possible to  accurately estimate either a timetable for implementation or our future compliance costs  relating to implementation, such laws, if enacted, could have a material impact on our  results of operations and financial condition. Examples of legislation or precursors for  possible regulation that do or could affect our operations include:  European Emissions Trading Scheme (ETS), the program through which many of  the European Union (EU) member states are implementing the Kyoto Protocol. Our  cost of compliance with the EU ETS in 2015 was approximately $0.4 million (net  share pre-tax).  In Canada during 2015, the Alberta government amended the regulations of the  Climate Change and Emissions Act. The regulations now require any existing facility  with emissions equal to or greater than 100,000 metric tonnes of carbon dioxide or  equivalent per year to reduce its net emissions intensity from its baseline. The  reduction is increasing from the current 12 percent in 2015, to 15 percent in 2016  and to 20 percent in 2017. We also incur a carbon tax for emissions from fossil fuel  combustion in our British Columbia operations. The total cost of compliance with  these regulations in 2015 was approximately $4.7 million.  The U.S. Supreme Court decision in Massachusetts v. EPA, 549 U.S. 497, 127 S.Ct.  1438 (2007), confirming that the EPA has the authority to regulate carbon dioxide as  an “air pollutant” under the Federal Clean Air Act.  The U.S. EPA’s announcement on March 29, 2010 (published as “Interpretation of  Regulations that Determine Pollutants Covered by Clean Air Act Permitting  Programs,” 75 Fed. Reg. 17004 (April 2, 2010)), and the EPA’s and U.S. Department  of Transportation’s joint promulgation of a Final Rule on April 1, 2010, that triggers  regulation of GHGs under the Clean Air Act, may trigger more climate based claims  for damages, and may result in longer agency review time for development projects.  The U.S. EPA’s announcement on January 14, 2015, outlining a series of steps it  plans to take to address methane and smog-forming volatile organic compound  emissions from the oil and gas industry. The current U.S. administration has  established a goal of reducing the 2012 levels in methane emissions from the oil and  gas industry by 40 to 45 percent by 2025.

Carbon taxes in certain jurisdictions. Our cost of compliance with Norwegian carbon  tax legislation in 2015 was approximately $31 million (net share pre-tax).  The agreement reached in Paris in December 2015 at the 21st Conference of the  Parties to the United Nations Framework on Climate Change, setting out a new  process for achieving global emission reductions.

In the United States, some additional form of regulation may be forthcoming in the future  at the federal and state levels with respect to GHG emissions. Such regulation could take  any of several forms that may result in the creation of additional costs in the form of  taxes, the restriction of output, investments of capital to maintain compliance with laws  and regulations, or required acquisition or trading of emission allowances. We are  working to continuously improve operational and energy efficiency through resource and  energy conservation throughout our operations.  Compliance with changes in laws and regulations that create a GHG emission trading  scheme or GHG reduction policies could significantly increase our costs, reduce demand  for fossil energy derived products, impact the cost and availability of capital and increase  our exposure to litigation. Such laws and regulations could also increase demand for less  carbon intensive energy sources, including natural gas. The ultimate impact on our  financial performance, either positive or negative, will depend on a number of factors,  including but not limited to:

Whether and to what extent legislation or regulation is enacted.

The timing of the introduction of such legislation or regulation.

The nature of the legislation (such as a cap and trade system or a tax on emissions)  or regulation.  The price placed on GHG emissions (either by the market or through a tax).  The GHG reductions required.  The price and availability of offsets.  The amount and allocation of allowances.  Technological and scientific developments leading to new products or services.  Any potential significant physical effects of climate change (such as increased  severe weather events, changes in sea levels and changes in temperature).

Whether, and the extent to which, increased compliance costs are ultimately  reflected in the prices of our products and services.

The company has responded by putting in place a corporate Climate Change Action  Plan, together with individual business unit climate change management plans in order to  undertake actions in four major areas:  Equipping the company for a low emission world, for example by integrating GHG  forecasting and reporting into company procedures; utilizing GHG pricing in planning  economics; developing systems to handle GHG market transactions.

Reducing GHG emissions—In 2014, the company reduced or avoided GHG  emissions by approximately 900,000 metric tonnes by carrying out a range of  programs across a number of business units.  Evaluating business opportunities such as the creation of offsets and allowances;  carbon capture and storage; the use of low carbon energy and the development of  low carbon technologies.  Engaging externally—The company is a sponsor of MIT’s Joint Program on the  Science and Policy of Global Change; constructively engages in the development of  climate change legislation and regulation; and discloses our progress and  performance through the Carbon Disclosure Project and the Dow Jones  Sustainability Index.

The company uses an estimated market cost of GHG emissions in the range of $8 to $35  per tonne depending on the timing and country or region to evaluate future opportunities.

Appendix III: GAO Contacts and Staff Acknowledgments

In addition to the contacts named above, Barbara L. Patterson (Assistant  Director), Giselle Cubillos-Moraga (Analyst in Charge), Anna Chung,  Cindy Gilbert, Jesse Lamarre-Vincent, Marc Molino, Tovah Rom, Grant  Simmons, and Tyler Spunaugle made key contributions to this report.

Public companies are required to disclose material risks that could affect their finances or operations in their Securities and Exchange Commission filings. These may include climate-related risks—for example, a need to improve facilities to meet emission requirements.

We reviewed steps SEC has taken to clarify companies' climate-related disclosure requirements. Industry representatives told us that they consider the requirements to be clear and adequate. At the same time, some investor groups expressed a need for more information. SEC has no current plans to modify its climate-related disclosure requirements.