Securities and Exchange Commission Issues Guidance Regarding Disclosure Related to Climate Change
On January 27, 2010 at an open meeting of the Securities and Exchange Commission, the SEC voted 3 to 2 to issue an interpretive release (Release Nos. 33-9106; 34-61469; FR-82) that provides guidance to publicly traded companies regarding the applicability of the existing SEC disclosure requirements to climate change-related risks. The release, issued February 2, 2010, reviews existing rules and regulations that could require or involve climate change disclosure. In connection with the release, the Commission stressed that by issuing the interpretive release, it was not creating new legal requirements or modifying any existing legal requirements. Rather, the interpretive release merely provides clarity and consistency for reporting companies in connection with the application of existing disclosure requirement to climate change matters. Chairman Schapiro stated that the Commission is not opining “on whether the world’s climate is changing; at what pace it might be changing; or due to what causes.” She further stated that the interpretive release is intended to “ensure that [the SEC’s] disclosure rules are consistently applied, regardless of the political sensitivity of the issue at hand, so that investors get reliable information.” Since the release is in the form of an interpretive release, it is effective immediately and thus applicable to periodic reports and proxy statements currently in process for calendar year-end companies.
OVERVIEW - CURRENT DISCLOSURE REQUIREMENTS
The release identifies the following existing SEC rules that may require disclosure related to climate change:
- Description of Business. Item 101 of Regulation S-K requires a description of the issuer’s business and specifically requires disclosure regarding the cost of complying with environmental laws and the impact compliance may have on capital expenditures, earnings and the competitive position of the company.
- Legal Proceedings. Item 103 of Regulation S-K requires a description of all material pending legal proceedings involving the company and known actions contemplated by governmental authorities that may be material to the company.
- Risk Factors. Item 503(c) of Regulation S-K requires that a company provide a discussion of the most significant factors that make an investment in the company speculative or risky, disclosing the risk and specifically how the particular risk affects the company.
- Management Discussion and Analysis (“MD&A”). Item 303 of Regulation S-K requires a company to disclose its view of the company’s financial condition and results of operations historically and prospectively, including known trends, events, demands, commitments and uncertainties that will, or are reasonable likely to, have a material effect on the financial condition or results of operations of the company.
The Commission also noted that the company should consider and address if material the financial statement implications of climate change under applicable accounting standards and should address and disclose any other information which is believed to be necessary for an understanding of the financial condition, changes in financial condition and results of operation of the company.
DEVELOPMENTS THAT MAY TRIGGER DISCLOSURE
Following an overview of current SEC rules and regulations that impose disclosure obligations, the Commission highlighted the following topics as examples of climate change matters that could trigger disclosure requirements under the Commission’s current rules and regulations:
Impact of Legislation and Regulation. Federal and state legislation and regulations regarding climate change could trigger disclosure obligations. Congress has not yet passed climate change legislation, but EPA has adopted climate change regulations. For example, publicly traded companies subject to EPA’s greenhouse gas emission reporting rule (finalized by EPA in 2009) must monitor their emissions beginning January 1, 2010 using “best available monitoring methods.” To the extent the cost of compliance is material, it would have to be disclosed. Pending changes in the law or regulations bearing on climate change may also trigger disclosure obligations. Registrants must evaluate the likelihood that the legislation will be passed, and whether it is reasonably likely to have a material effect on their financial condition or operation. Under the release, disclosure is required, unless the registrant concludes that legislation or regulation is not reasonably likely to be implemented, and if implemented, it is not reasonably likely to have a material effect on the company.
Impact of International Accords. The Commission states that companies should consider, and disclose when material, the impact on their business of treaties or international accords related to climate change, such as the Kyoto Protocol and the European Union Emissions Trading Scheme. The SEC suggests that domestic companies with foreign operations should be particularly sensitive to and monitor the progress of any such potential agreements and arrangements.
Indirect Consequences of Regulation or Business Trends. The interpretive release notes that legal, technological, political and scientific developments related to climate change could create or have an impact on a company’s products or services, either increasing or decreasing the demand for such products and services, or creating an opportunity for new product or services. Further, business trends or risks could trigger disclosure either as a risk factor or in MD&A or in the description of the company’s business.
Physical Impacts of Climate Change. The Commission noted that companies with operations that could be affected by severe weather or climate related events should evaluate and consider disclosure of potential physical effects and disclose material risks or consequences resulting from such effects. The interpretive release notes that significant physical effects include severe weather such as hurricanes and floods, rising sea levels, drought and reduced water supply.
The Commission stated that it will monitor the effect of the interpretive release on company filings under existing securities laws and regulations and that it will consider additional guidance or rulemaking on a continuing basis. Given the information provided, it would not be surprising for the Commission to engage in formal rulemaking, requiring specific disclosures. The roundtable that the Commission will convene this spring on climate change related disclosure should provide further insight.
WHAT TO DO NOW
As noted above, the vote to issue the climate change interpretive release split along party lines. Thus, it should come as no surprise that reactions to the SEC’s decision have likewise split along party lines. Despite the initial sparring about the SEC’s interpretive release, most commenters who have reviewed it in detail now agree that it does not break new ground. The release does, however, confirm that the SEC’s existing disclosure rules do apply to climate change-related risks. Thus, companies that have been operating under the assumption that the uncertainty surrounding climate change justifies inaction can no longer do so.
Companies must evaluate potential climate change legislation and regulation, as well as climate change-related impacts, just as they would evaluate any other development for disclosure. They must determine if the legislation, regulation, or development is “reasonably likely to occur,” and if so, whether its impact is “reasonably likely” to have a material effect on the company. What remains shrouded in uncertainty are the harder questions, such as the time horizon for determining whether a climate change-related impact is material.
Companies should consider adding the standards in the interpretive release to their internal disclosure controls and procedures as a part of the compliance function. Disclosure controls and procedures must ensure that the information required to be disclosed is documented in order to ensure that management has timely information.
Print PDF