3.4.2.0 Introductie

The US does not have a single environmental code, as it happens in for example in Sweden. Environmental Law in the US is combined in state, federal, and international regulation. The government agency responsible for administering environmental regulations is the Environmental Protection Agency (EPA), however, states may also have their own environmental enforcement agencies.2 Both the EPA and state environmental enforcement agencies have the capacity to write and enforce environmental regulations.3 Final regulations about the protection of the environment is part of title 40 of the U.S. Code of Federal Regulations, which is the section that deals with EPA’s mission of protecting human health and the environment. The Federal Register is the official daily publication for rules, proposed rules, and notices of federal agencies and organizations, as well as executive orders and other presidential documents.

The US does not have a single code of corporate governance, as it happens in the Netherlands, Sweden and also in Brazil.4 One of the reasons behind it is that, corporate law also does not have a centralized regulation, it is subject to state regulation and not to federal statutes.5 Another reason pointed out, is that the US history of rules –based regulation could turn a possible corporate governance code into a prescriptive set of rules.6 Corporate governance standard development is decentralized.7 Among the US corporate governance codes, are the Full CII Corporate Governance Policies (2013), principles of Corporate Governance (2012), the Key Agreed Principles to Strengthen Corporate Governance for U.S. Publicly Traded Companies (2008) and the TIAA-CREF Policy Statement on Corporate Governance (2007).8 These sets of corporate governance guidelines are flexible in order to accommodate different circumstances.9

A major change to the US approach to sustainability reporting is under way. Around 80% of the sustainability information disclosed by companies and outside of their 10-K form10 is immaterial to investors (Khan, Serafeim, Yoon, 2015).1112Besides, material information changes constantly and investors need regulatory change to respond effectively to their constantly developing needs.13 The SEC has acknowledged the importance of sustainability disclosures for investors and the corporate sector.14 Under the SEC rules companies are already required to disclose in their financial fillings (Form 10-K, under Regulation S-K) any material risks related to climate change since 2010.1516In 2010, the SEC published an interpretative release providing guidance on climate change-related disclosures under the existing regulation, e.g. regulation S-K.17 However, these disclosures do not yet meet the investor’s needs. In recognition of the risks that climate change and other Environmental, Social and Governance risks pose to companies and investors, the SEC has decided to improve sustainability reporting requirements in their current fillings.18 In April 2016, the SEC issued a concept release on business and financial disclosure required by regulation S-K. From the 341 pages of the concept release, 11 pages were dedicated to sustainability disclosure.19 The SEC called feedback on among others issues, sustainability disclosures.20 On the 13th of July 2016, the SEC issued the proposed rule with the proposed changes to simplify certain disclosure requirements and to eliminate redundant, overlapping, outdated, or superseded disclosure requirements, in light of other SEC disclosure requirements, the United States Generally Accepted Accounting Principles (US-GAAP), the International Financial Reporting Standards (IFRS) and technology.21 The SEC is seeking public comment on modernizing certain business and financial disclosure requirements in Regulation S-K and on proposed amendments to its disclosure requirements for registrants involved in mining activities.22 The proposed amendments are for, among others, Rule 601 of Regulation S-K under the Securities Act and the Exchange Act and Form 10-K under the Exchange Act.

There was a 60-day public comment period on the proposed changes, all comments were to be received by the SEC on or before the 3rd of October of 2016.23 On the 25th July of 2016, the SEC had received a total of 26,391 comment letters, from which 9,862 letters asked for disclosure on “sustainability plans”, tax payments by country and political spending.24 Investors voiced their interest in higher sustainability disclosure by replying to the SEC call for comment letters. Forty-five investors, representing USD$ 1.1 trillion in assets under management proved their demand for improved sustainability disclosures by backing up the Ceres comment letter sent to the SEC calling for enhanced sustainability disclosure to level the playing field and for increasing comparability of the information provided to investors.25 Another thirty-five investors, members of Ceres’ Investor Network on Climate Risk, among which was CalPERS and Domini Social Investment, have written their own comment letters to the SEC highlighting pressing issues as the board independence, essential for risk oversight (e.g. climate change and cyber security), the importance of externalities and encouraging the SEC to develop rules “that would help companies to identify appropriate KPIs by industry and sub- sectors; establish a common standard to measure the KPI and introduce standardized reporting of KPIs on an annual basis”.26

This high response from investors shows the increasing commitment of investors to long-term value creation and through direct public policy engagement they are making their voice heard. Investors have the power to voice their interest in long term investing and reach out to the policy makers and regulators responsible for changing public policy.27 In the US, investors have been responsible for important regulatory changes, both from public policy and company-specific advocacy by investors. Among others, in 2010 pension funds together with elected officials with fiscal management responsibilities and Ceres, addressed the SEC with a rule- making petition and were responsible for the SEC’s issuance of the guidance requiring corporate disclosure of material climate change risks; also the Dodd- Frank provisions requiring an advisory vote on executive compensation (“Say on Pay”) and the disclosure of conflict minerals.28

Among the respondents to the SEC’s public consultation is the Sustainability Accounting Standards Board (SASB).29 The SASB highlighted the compatibility of their framework with the SEC fillings and explained the benefits of its use of KPI’s by industry and sectors for both corporate guidance and transparency purposes.

If these changes take place, sustainability reporting in the US will become mandatory for listed companies. This development can improve materiality, the quality of the information disclosed to investors and comparability.30 What about the enforcement of the additional sustainability requirements? Could the SEC eventually mention the use of the SASB as a potential requirement, similar to the United States Generally Accepted Accounting Principles (US-GAAP) used for enforcing financial reporting through the Form 10-K? The SASB is in its early stages of development and testing, however, it is a promising development to follow closely to see how many companies will use these standards in their SEC filings.

On the 12th of November of 1998, the US signed the Kyoto Protocol, the first legally binding climate protocol to reduce greenhouse gas emissions but never ratified it. The EU, together with Brazil signed the Kyoto protocol on the 29th of

April of 1998, it was then approved on the 31st of May of 2002 and entered into force on the 16th of February of 2005. Developed countries who signed and ratified the protocol committed to reduce GHG emissions 5% on 1990 levels by its first commitment period which started in 2008 and ended in 2012.313233192 Parties (191 States and the EU) signed and ratified the Kyoto Protocol to the United Nations Framework Convention on Climate Change. The Kyoto Protocol sets binding emission reduction targets for 36 developed countries and the EU.34 However, the two largest GHG emitters, the US and China did not and they remained free of any commitments. The successor of the Kyoto protocol is the Paris agreement (COP 21). As of the 7th of September of 2016, 180 countries signed the Paris Agreement, a binding agreement to combat climate change, committing to reduce GHG emissions and keep the global temperature rise well below 2 degrees Celsius, through Nationally Determined Contributions (NDCs).3536Until September 2016, only 27 Parties, accounting in total for 39,08% of the total GHG emissions, have ratified the Paris Agreement.37 Under the Obama Administration, the US and China have jointly ratified the Paris Agreement before the G20 Summit at the West Lake Guest House in Hangzhou in China on the 3rd of September of 2016.38 Both countries have submitted their plan to join the Paris agreement to the UN Secretary-General Ban Kin-moon.39 This commitment form the two largest economies in the world have the potential to influence other countries to take the same step (e.g. Australia).404142

Under the Trump administration, the US triggered the official withdrawal procedures from the Paris Agreement, which may last until 2020. This situation may hinder the global efforts towards mitigating climate change.43 In a reaction to President Trump’s decision, President Obama stated the following: “I believe the United States of America should be at the front of the pack. But even in the absence of American leadership; even as this Administration joins a small handful of nations that reject the future; I’m confident that our states, cities, and businesses will step up.”44 I completely agree with President Obama; and as we know presidential mandates are transitory. Policy makers tend to last longer than Presidential mandates so even if there are policy set-backs I believe that those in principle, should not be the main reason for not achieving a major cause such as climate change. ESG risk management is here to stay and I do not believe that a Presidential mandate of one, even if from a major economy, will stop it.

In line with the above thoughts, the US federal Government does not influence all the US states. Not all states support Trump’s decision and therefore, thirteen states, including California, New York and Washington, DC,45 have joined the United States Climate Alliance, a group formed by New York Governor Andrew Cuomo, California Governor Edmund G. Brown Jr., and Washington State Governor Jay Inslee.46 The situation is not as promising as before the Trump’s decision, however, the US states are increasingly making their own commitments to tackle climate change. As an example, California passed a Bill in September 2018, requiring CalPERS and CalSTRS to publicly report every three years on the climate-related financial rsiks of their public market portfolios.47 Another example from Californina insurance regulator requiring insurers to disclose their fossil fuel- related holdings.48 The United States Climate Alliance seeks to reduce greenhouse-gas emissions nationwide, showing their commitment to pursue policies that will keep the US’s commitments to the Paris Agreement.49

Moreover, China has kept its position, joining forces with the EU and other countries to make the global efforts to tackle climate change a reality.50 As we have seen in chapter 2, the IFRS were already developed without the support of a major economy, such as the US. We have seen before that it is possible to develop globally accepted international standards without the support of the US. So I would say that the global efforts to tackle climate change may still be possible without the full support of the US federal government.51 This will of course not come without challenges and the states part of the climate alliance will possibly have to deal in the future with questions such as, federal budget limitations of the Environmental Protection Agency and U.S. national policy contradiction with the Paris agreement e.g. removing restrictions on the U.S. coal industry.52

The US has felt the impacts of climate change and in 2011 were registered USD $ 69 billion of weather-related damages.53 As of July 2016, there have been 8 climate disaster events with losses exceeding USD $1 billion each.54 Climate change affects 93% of the US market cap.55In 2007, the US Supreme Court ruled that the Clean Air Act empowered the government to regulate GHG emissions.56 In this case, the court based its decision on the Clean Air Act, which is a different situation from The Hague District Court’s decision to oblige the Dutch Government to deal with environmental issues, in 2015, founded on an independent basis.57 In 2009, the Obama Administration committed to reduce US greenhouse gas emissions (GHG) 17% below the levels registered in 2005, by 2020. This target was submitted to the United Nations Framework Convention on Climate Change Secretariat under the Copenhagen Accord,58 a non-binding agreement drafted by the US, China, India, South Africa and Brazil, in December 2009 at the United Nations climate talks.59 Under the SEC disclosure rules, US companies are required to disclose in their financial fillings any material risks related to climate change.60 In February 2010, the SEC published an interpretative release to provide guidance to the US public companies on their climate change disclosures.61 The climate change related disclosures would fall under the existing disclosure requirements (the SEC’s Regulation S-K, including Forms 10-K and 20F filings) and do not add any new legal obligation.62 In result of the SEC requirements, in 2014, 27% of the S&P 500 companies reported on climate change-related risks in their SEC filings, compared to 5% in 2013.63 In the S&P Global 1200, 43% of the companies has reported their GHG emissions, compared to 37% in 2013. Small US companies have also been reporting their GHG emissions, 47% of small companies have reported their GHG emissions in 2014, compared to 25% in 2013.64 As for the S&P 500 companies, in 2014, 30% reported on their GHG emissions compared to 26% in 2013.65 Several studies addressed the impact of the SEC’s guidance on climate-related disclosures, including, the quality of the information disclosed and also potential additional costs.66 Some of the findings of these studies include the lack of experience of reporters in disclosing climate change-related risks, limited enforcement and lack of interest in the information disclosed from financial analysts, asset managers and investors.

In addition to the SEC’s requirements, the US has further addressed its concerns with climate change by introducing legislation to reduce GHG emissions. E.g. the Global Warming Solutions Act of 2006, from the state of California; other state and regional programs, include the Regional Greenhouse Gas Initiative, the Western Climate and the Midwestern Greenhouse Gas Reduction Accord have been developed to restrict greenhouse gas emissions.67

Despite these regulatory examples, in a survey, the Pew Center on Global Climate Change found that the Americans and the Chinese, currently responsible for the highest annual CO2 emissions, are among the least concerned.68 As for Americans and Europeans, ISIS ranked on top of their priorities (68%), and their ideologies influenced their concerns.69 However, the US Government has made serious commitments towards climate change mitigation. In June 2013, the US President Obama announced “The President’s Climate Action Plan”.70 Among other goals, the Climate Action Plan, sets the target of reducing at least 3 billion metric tons of carbon pollution by 2030 and directs the Environmental Protection Agency to work closely with states, industry and other stakeholder to establish carbon pollution standards for both new and existing power plants.71 In November 2014, the US President Obama announced in China the target to reduce GHG emissions by 26- 28% below 2005 levels by 2025. On the 31st of March of 2015, the US submitted this target to the United Nations Framework Convention on Climate Change, in a formal statement referred to as an Intended Nationally Determined Contribution.7273Further in November 2015, the White House announced additional commitments from 73 companies joining the American Business Act on Climate Pledge, making a total of 154 companies which have given their support for action on climate change.74 In addition, six of the largest banks in the US issued a call for leadership and cooperation among Governments to ensure a strong global climate agreement.75

On the 26th of June of 2016, the US took part of the North American Leadership Summit, in Ottawa. The Summit counted with the participation of the Heads of State from Canada, Mexico and the US, showing their political alignment on various issues including climate change.76 The Leaders’ Statement and Action Plan included actions on the North American Climate, Clean Energy, and Environment Partnership, including “a target to increase clean power to 50% of the electricity generated across North America by 2025, reducing methane emissions from the oil and gas sector by 40-45% by 2025. Also affirmed their support for joining and implementing the Paris Agreement and commitment to work together to address climate issues through the Montreal Protocol, International Civil Aviation Organization, G-20, and other forums.”77

A recent study from the World Resources Institute identified the potential of the US commitments to tackle climate change, under the current federal regulation and state level commitments and actions.78 The findings include, i) the US is not yet in the path to meet its international commitments to reduce GHG emissions; ii) although it could achieve its GHD reduction goals under current legislation, it will need a “go-getter” action or otherwise, the new legislation from the US Congress;79 and iii) to achieve its goals it will need the cooperation of the Congress, states and the executive branch.80

Investors have the power of voicing their interests through different channels, including through direct engagement (e.g. company-specific, public policy engagement) and voting.81 In result of the US budget sequestration in 2013, mentioned above, budgets cuts have been required, also affecting climate change projects. Companies and investors have mobilized efforts to engage in the change of public policy.82 As an example, the members of Ceres’ Investor Network on Climate Risk (INCR)83 wrote to the SEC in June 2016 requesting better enforcement of its 2010 guidance to companies on climate risk disclosure.84 However, in July 2016, House lawmakers passed legislation that prohibits the SEC from enforcing the climate risk disclosure guidance.8586

Another example showing the increasing active role of US investors is the creation of the Investor Stewardship Group in 2018. This group represents an estimated $31 trillion USD in US equity markets.87 This initiative indicates, that independently from the US Government support, the interest in responsible investment in the US is growing.88