Proposed Bill to Require Companies to Disclose Climate Risk

A bill that would require US public companies to disclose the risks climate change could pose to their business has passed a key vote in the House Financial Services Committee.

The Climate Risk Disclosure Act of 2019 would require the Securities and Exchange Commission (SEC) to develop and implement guidelines for companies on disclosing climate risks, which the regulator would be required to make public on its website.

Originally introduced in 2018, the legislation was recently reintroduced by Democratic Rep. Sean Casten of Illinois and Massachusetts Sen. Elizabeth Warren.

“Public corporations must take responsibility for the large financial risks posed by the impacts of climate change, while embracing the economic opportunity of being global leaders in developing a clean energy economy,” said Casten in a statement. “Our bill utilizes market mechanisms to incentivize climate action by ensuring that corporations disclose the risks posed by climate action to the benefit of their shareholders and the public.”

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The proposed legislation would link disclosures to a scenario in which global temperatures are prevented from rising more than 1.5 degrees Celsius above pre-industrial levels. The bill would direct the SEC, in consultation with climate experts at other federal agencies, to issue rules within one year that require every public company to disclose:

Direct and indirect greenhouse gas emissions
The total amount of fossil-fuel related assets that it owns or manages
How its valuation would be affected if climate change continues at its current pace or if policymakers successfully restrict greenhouse gas emissions to meet the 1.5 degree Celsius goal
Risk management strategies related to the physical risks and transition risks posed by climate change

The proposed legislation would also direct the SEC to tailor the disclosure requirements to different industries, and to impose additional disclosure requirements on companies engaged in the commercial development of fossil fuels.

The backers of the bill cited a June report from Moody’s Analytics that said global economic damage related to climate change will be an estimated $54 trillion in 2100 under a warming scenario of 1.5 degrees Celsius, and $69 trillion under a warming scenario of 2 degrees Celsius. They say the bill will help the market appropriately assess the risk of climate change, which they believe will spur private actors and government actors to act more decisively to address the climate crisis and promote financial stability.

“It’s time to wake up and fight back against giant corporations that want to pollute our environment and ask taxpayers to clean up the mess,” said Warren in a statement.

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Tags: Climate Change, Climate Risk Disclosure Act of 2019, ESG, House Financial Services Committee

Real estate advisory firm AR Capital LLC, its founder, and its chief financial officer have agreed to pay more than $60 million to settle SEC charges that they wrongfully obtained millions of dollars in connection with two separate mergers between real estate investment trusts (REITs) that AR Capital sponsored and externally managed.

According to the SEC’s complaint, between late 2012 and early 2014, AR Capital arranged for American Realty Capital Properties Inc. (ARCP), a publicly traded REIT, to merge with two publicly held, non-traded REITs: American Realty Capital Trust III, Inc. and American Realty Capital Trust IV, Inc. The SEC alleges that AR Capital, its founder Nicholas Schorsch, and CFO Brian Block inflated an incentive fee in both mergers.

The SEC alleges that an “improper calculation” allowed them to obtain approximately 2.92 million additional ARCP operating partnership units as part of their incentive-based compensation. In addition, the complaint alleges that the defendants wrongfully obtained at least $7.27 million in unsupported charges from asset purchase and sale agreements entered into in connection with the mergers.

“REIT managers and their professionals have an obligation to tell the truth when making disclosures to shareholders about their compensation,” said Marc P. Berger, director of the SEC’s New York Regional Office. “As we allege in our complaint, AR Capital and its partners Schorsch and Block failed to do so and benefitted themselves greatly at the expense of shareholders.”

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The defendants allegedly inflated the calculation of the American Realty Capital Trust III promote fee in three ways. First, they allegedly used a trailing five-day average price of ARCP stock instead of the ARCP closing price on the day prior to the merger closing. Second, they allegedly disregarded the actual cash stock elections by American Realty Capital Trust III’s shareholders. And thirdly, they allegedly used an unsupported multiplier in the conversion to operating partnership units portion of the calculation.

The SEC also accused the defendants of directing the creation of and/or approving misleading asset purchase and sale agreements in which AR Capital received $5.8 million from ARCP in connection with each merger. This was purportedly for ARCP’s purchase from AR Capital of furniture, fixtures, and equipment necessary for the post-merger operations of ARCP and the reimbursement to AR Capital of certain “unreimbursed expenses.” The SEC alleges that the defendants wrongfully obtained at least $7.27 million in unsupported charges through those agreements.

AR Capital, Schorsch, and Block, without admitting or denying the allegations in the complaint, have consented to entry of a final judgment that imposes permanent injunctions from violations of the charged provisions. The settlement includes combined disgorgement and prejudgment interest on a joint-and-several basis of more than $39 million, which includes cash and the return of the wrongfully obtained ARCP operating partnership units. It also imposes civil penalties of $14 million against AR Capital, $7 million against Schorsch, and $750,000 against Block. The settlement is subject to court approval.

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Tags: Adviser, AR Capital, Real Estate, SEC