From wildfires in New Mexico, to droughts in Vietnam, and extreme temperatures and historic flooding in China, it is clear that urgent action must be taken to combat climate change. In the last decade – and in line with the transition towards achieving net-zero emissions by 2050 – stakeholders have increasingly highlighted how corporations contribute to climate change. For example, a recent report shows that 57 oil, gas, coal and cement companies are responsible for 80 percent of the world’s global fossil CO2 emissions. Through their operations and activities, companies release greenhouse gases, exacerbating global warming. Although publicly traded companies have traditionally focused on the primary goal of increasing shareholder wealth, there has been a recent shift away from profit making towards stakeholder-oriented companies which incorporate broader Environmental, Social, and Governance (ESG) goals.
After two years of public debate, the United States Securities and Exchange Commission (SEC) adopted rules to enhance and standardize climate-related disclosures by public companies and in public offerings which apply to both domestic and foreign private issuers. Effective May 28, 2024, companies are required to provide information regarding climate-related risks that have materially impacted or are likely to have a material impact on their business strategy, results of operations, or financial condition in their registration statements and annual reports. The SEC nevertheless has suspended the application of the rules pending the outcome of several claims instituted in U.S. courts.
Although criticism has trailed the introduction of the mandatory rules, they are part of the global convergence of standards for climate-related disclosure. More than a decade after the first Conference of the Parties (COP) of the United Nations Framework Convention on Climate Change (UNFCCC) was hosted in the GCC by Qatar in 2012, it is time to ask if the Gulf Cooperation Council (GCC) should follow suit and impose mandatory climate-change disclosures. The short answer is that while following international best practices is important, mandatory disclosures are unnecessary for the time being.
Increasing focus on companies has also led to climate change-related disputes and a rise in ESG activist shareholders who aim to shape the climate change policies of corporations through strategic shareholding. In June 2024, a U.S. judge dismissed Exxon Mobil’s lawsuit against an activist shareholder who the company described as adopting a “Goldilocks Trojan Horse” strategy to disrupt its operations for 11 years through proxy statements. Last September, a British High Court dismissed an attempt by the NGO Climate Earth to launch a derivative action against the directors of Shell PLC for alleged failures to properly address climate change risks.
These two court decisions raise the question whether the average shareholder in a GCC listed company will base their decision to invest as a result of climate-change disclosures. In addition to the SEC Disclosure Rules, new laws in California will require private companies with significant revenue to make climate-related disclosures starting in 2026. Adopted May 2024, the European Union Corporate Sustainability Due Diligence Directive imposes obligations on large companies regarding adverse impacts of their activities on environmental protection.
According to the SEC, the climate change disclosure rules are a response to investors’ demand for more consistent, comparable, and reliable information about the financial effects of climate-related risks. While it will take time for the legal implications of the rules to come into effect, it is clear that they will increase the exposure of listed companies to shareholder derivative claims and regulatory risk. The rules will also result in significant operational and compliance costs.
While the U.K., EU and U.S. have been hotbeds for climate change-related shareholder disputes in the last few years, the same cannot be said of the GCC. This may be because many GCC companies are family-owned with concentrated shareholding. That said, in January 2023 the GCC Exchanges Committee released ESG Disclosure Guidance for Listed Companies, which contains metrics for disclosure of actual or estimated atmospheric emissions produced as a direct (or indirect) result of a company’s consumption of energy.
Despite the adoption of GCC Exchanges Committee metrics, different disclosure obligations nevertheless exist within member states. Since 2021, the United Arab Emirates’ Securities and Commodities Authority (SCA) has obliged all 130 listed public joint stock companies to publish an annual sustainability report which discloses ESG impact, commitments, and policies. Conversely, Article 39 of Governance Code for Companies & Legal Entities Listed on the Main Market simply provides that companies listed on the Qatar Stock Exchange do their part in community development and promotion, and preservation of the environment through an effective and meaningful participation system of corporate social responsibility.
The choice between mandatory and non-mandatory disclosures for companies is a choice regulators around the world will increasingly have to face. For securities regulatory authorities, which have a duty to protect investors and maintain capital market stability, recent developments in the EU and the US will serve as a testing ground for the empirical assessment of the influence disclosures have on investor confidence and climate mitigation.
GCC companies should take note and not retain a “business as usual” attitude. Climate change considerations should become an integral part of their business risk assessments and decision making.
