On February 2, 2010, the U.S. Securities and Exchange Commission (SEC) published new interpretive guidance (the Release) that clarifies the information companies with reporting obligations under the U.S. federal securities laws and regulations must disclose in documents they file with the SEC regarding the impact of climate change on the company, its business, financial conditions and results of operations. While the SEC’s interpretive release does not create new legal requirements, nor modify existing ones, it does change the landscape governing climate change disclosure.
The Release identifies specific rules where disclosure related to climate change may be required. These non-financial statement rules govern disclosure of the following areas:
- Description of business;
- Legal proceedings;
- Risk factors; and
- Management’s discussion and analysis.
In addition, the SEC outlines some of the ways climate change may trigger disclosure. The following topics are examples of climate change-related issues that a registrant may need to consider:
- Impact of legislation and regulation: When assessing potential disclosure obligations, a company should consider whether the impact of certain existing laws and regulations regarding climate change is material. In certain circumstances, a company should also evaluate the potential impact of pending legislation or regulations (for more information, please see our Osler Update entitled U.S. House of Representatives Passes American Clean Energy and Security Act).
- Impact of international accords: A company should consider, and disclose when material, the impact on their business of treaties or international accords relating to climate change, as applicable, such as the Kyoto Protocol, the European Union Emissions Trading System and any future international treaties focused on remedying environmental damage caused by greenhouse gas emissions.
- Indirect consequences of regulation or business trends: Legal, technological, political and scientific developments regarding climate change may create new opportunities or risks for companies. For instance, a company may face decreased demand for goods that produce significant greenhouse gas emissions or increased demand for goods that result in lower emissions than competing products. As such, a company should consider, for disclosure purposes, the actual or potential indirect consequences it may face due to climate change related regulatory or business trends, including the impact on its reputation.
- Physical impacts of climate change: Significant physical effects of climate change, such as effects on the severity of weather (for example, floods or hurricanes), sea levels, and water availability and quality, have the potential to affect a company’s operations and results. Companies whose businesses may be vulnerable to severe weather or climate related events should consider disclosing material risks of, or consequences from, such events in their disclosure documents.
The SEC indicated that it will monitor the impact of the Release on company filings as part of its ongoing disclosure review program. Thus, companies will need to review and understand the SEC’s new interpretive guidance to ensure compliance with the disclosure requirements. The Release notes that non-U.S. companies that make their disclosure in accordance with Form 20-F are likely to require disclosure related to climate change that parallels requirements applicable to U.S. domestic issuers.
Canadian foreign private issuers that rely on the Multijurisdictional Disclosure System to make registered offerings of securities in the United States and to satisfy their U.S. continuous disclosure obligations are not directly affected by the Release. Nevertheless, Canadian foreign private issuers may wish to consider the SEC’s guidance as a potentially significant development in disclosure best practices.