Member Spotlight: National Whistleblower Center

Member Spotlight: National Whistleblower Center

Strong climate risk disclosure requirements could help whistleblowers reveal deception by companies and banks

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In order to meet the targets set out by the Paris Agreement in 2016, the world needs to move rapidly towards net zero emissions and take immediate action to protect tropical forests. Many fossil fuel companies have ignored this imperative and continued to spend aggressively on new exploration and development, while logging and other forest-risk commodity companies have pushed even further into vulnerable tropical forests.

Banks have likewise failed to heed warnings about climate change; since the Paris Agreement was signed, just 35 banks have spent USD 2.6 trillion on fossil fuel financing and at least USD 153 billion on forest-risk commodities. As the physical impacts of climate change intensify and the world inevitably transitions towards a low-carbon economy, these investments could wipe trillions off the global economy.

Despite the serious threat climate change presents to companies and financial institutions, U.S. federal securities law currently only requires companies to disclose climate-related risks if they are material to investors. Companies are not explicitly required to disclose specific climate-related information, meaning that companies can determine themselves which risks are material, with little oversight or accountability.

As the threat of climate-related deception grows, U.S. whistleblower laws could be a powerful tool for revealing schemes designed to hide climate risks.Whistleblowers can currently use the Dodd-Frank Act to report material climate risks that have been illegally concealed from investors, regulators, and the public.

With stronger disclosure requirements mandated by agencies and lawmakers, however, whistleblowers could better assist financial regulators in identifying otherwise hidden risks that threaten the environment and the economy.

The Need for Stronger Disclosure Requirements

Robust, comparable and mandatory climate risk disclosures could prevent corporations and financial institutions from hiding serious risks or misleading investors through vague or contradictory sustainability claims. Europe has been leading the way on climate-risk related regulation to date, but U.S. regulators and politicians are beginning to recognize the serious nature of climate risk.

Two recent pieces of legislation show how federal regulators could address climate financial risks. The Climate Risk Disclosure Act, introduced by Senator Elizabeth Warren, would direct the Securities and Exchange Commission (SEC) to require publicly-listed companies to disclose information regarding climate risks and mitigation strategies. The Climate Change Financial Risk Act of 2019, introduced by Senator Brian Schatz, would direct the Federal Reserve to require banks to conduct climate “stress tests,” which test how a bank would fare in scenarios such as the sudden adoption of a high carbon price or a fire sale on carbon-intensive assets.

These bills outline the steps that regulators could take, but the Biden administration will not need to wait for them to be passed in order to act.

Financial Regulators Can Compel New Disclosures

Existing statutes already provide the SEC and the Federal Reserve, among other financial regulators, with the authority to compel new disclosures from companies, including financial institutions, and to take broad actions to address climate change as a systemic risk.

As Senator Warren reminded the SEC in her August 2020 letter, the SEC has the authority to require public companies to disclose climate-related information under Section 13 of the Securities Exchange Act of 1934. The SEC could require companies to include direct and indirect greenhouse gas emissions, exposure to physical risks, and transition plans and targets. The SEC could also direct the Public Company Accounting Oversight Board, which oversees the auditing industry, to assess whether audits are adequately detecting climate risks and provide auditors with guidance on assessing climate risks.

An effective disclosure regime would need to apply to not just to fossil fuel and deforestation-linked companies, but also to the banks and nonbank financial institutions that invest in and finance them. A recent report from the Center for American progress highlights that the SEC can prioritize the financed emissions of the financial sector and has the authority to “achieve as close as possible to a federal mandate for disclosure of financed emissions.”

The SEC can require disclosures from any publicly-listed corporation, including publicly-listed banks and publicly-listed nonbank financial institutions, such as asset managers, bank holding companies, and insurance companies. This would include the top banks fueling climate change, such as JP Morgan, Citigroup, Bank of America, and Wells Fargo, as well as the bank holding companies that own and control them. The SEC can also require disclosures from other securities market participants such as stock exchanges, securities brokerages, mutual funds, auditors, and investment advisors.

In addition to the disclosures required by the SEC, the CFTC’s 2020 report on climate risk highlights that the Board of Governors of the Federal Reserve can require disclosures from the non-bank financial companies it supervises and bank holding companies of a certain size. A report from the sustainable investor group Ceres highlights that the Federal Reserve could build on existing frameworks created by the Platform for Carbon Accounting Financials and work with the SEC to require banks to assess and disclose climate risks.

The Commodity Futures Trading Commission (CFTC) can also address climate risks in the commodities and derivatives markets. As the Revolving Door Project has highlighted, the CFTC requires swap dealers in these markets to disclose certain risks and could require them to disclose climate-related risks as well. The CFTC could also incorporate climate risk into stress tests for derivatives clearinghouses and require market participants to hold adequate capital for managing climate risks.

The Need for Greater Oversight of Financial Institutions

In addition to the Dodd-Frank Act’s powerful whistleblower provisions, a recent paper from the Great Democracy Initiative argues that the Dodd-Frank Act already contains the authority regulators need to go beyond disclosure requirements and address climate change as a systemic risk.

Created in the wake of the 2008 financial crisis, the Dodd-Frank Act gave financial regulators extensive authority to engage in “macroprudential” regulation, regulation aimed at addressing systemic risks that could lead to a financial crisis.

Among the new risk management approaches created by the Dodd-Frank Act are bank “stress tests,” like those included in the Climate Change Financial Risk Act. These tests have been increasingly used to evaluate how banks would be impacted by hypothetical economic downturns and whether they have sufficient capital.

As climate change poses a systemic risk to the financial system, the Federal Reserve could require banks to conduct climate stress tests. If a bank cannot pass the test, regulators could restructure the bank by forcing it to divest certain assets or operations.

Other Federal Reserve actions under macroprudential regulation could include updating capital rules and margin requirements to account for climate risks. The Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC) can also ensure that climate change is integrated into bank supervision and that bank lending and investment activities with climate risks are closely monitored.


The powerful whistleblower programs established by the Dodd-Frank Act create the potential for whistleblowers to reveal otherwise hidden climate-related risks, but so far these whistleblower programs have been greatly underutilized in addressing climate-related financial fraud.

If regulators use their existing authority to enhance disclosure requirements and address systemic risks, whistleblower-assisted enforcement of these new disclosure regimes could play an important role in deterring, detecting, and prosecuting fraudulent attempts to conceal climate-related risks.