The potential effects of climate change on business operations and uncertainty arising from the increasingly complex array of federal, state, and local climate change laws and regulations create many questions for companies, including how these issues should be addressed in investor disclosures. Since 2007, statement government officials and investors have sought clarification from the Securities and Exchange Commission (SEC) regarding how and when companies should disclose climate-change related risks and impacts. In response to these requests the SEC issued on February 2, 2010 a new interpretive document in the Federal Register intended to inform public companies regarding their obligation to disclose to investors the impacts on their businesses of existing and proposed laws and regulations related to climate change (the "Interpretation"). The Interpretation further directs companies to assess possible physical changes to the environment resulting from climate change and disclose the potential impacts of climate change on the companies' businesses. In an accompanying January 27, 2010 press release, the SEC announced that the Interpretation did not "create new legal requirements nor modify existing ones, but are intended to provide clarity and enhance consistency for public companies and their investors." Even though the Interpretation is not a new rule or regulation, SEC guidance is generally viewed as binding. The Interpretation will become effective upon publication in the Federal Register.
The Interpretation provides guidelines for evaluating climate change-related risks under existing SEC regulations. The Interpretation does not change the standard for determining whether environmental liability information is "material," thus requiring disclosure in periodic SEC filings and public offering statements. Under well-established law, information is "material" if it would be important to a reasonable shareholder or investor or if it would "significantly alter" the total mix of information available. The Interpretation merely clarifies the SEC's views regarding the application of existing disclosure requirements to climate change issues.
The Interpretation principally discusses four (4) ways climate change could present material risks and trigger SEC disclosure obligations.
- (a) Impact of Legislation & Regulation - Both existing and pending climate change legislation and regulations may trigger disclosure obligations. SEC registrants must assess the extent to which climate change regulations or legislation will likely have a material effect on the company's financial condition. SEC registrants must also evaluate the likelihood that pending climate change legislation will be enacted and the likelihood that the legislation will materially affect the financial conditions and operations of the company. Some examples of information whose disclosure should be assessed include estimate capital expenditures for environmental controls, costs for modifying facilities into compliance with emissions controls, trading emission allowances under the pending "cap and trade program," or profits and losses related to changing demand for good and services.
- (b) International Accords - Companies that are likely to be affected by international climate agreement are advised to consider the possible impacts of the international accords when determining disclosure obligations.
- (c) Indirect Consequences of Regulations or Business Trends - SEC registrants should identify risks or opportunities related to climate change for the purposes of disclosure. Indirect consequences might include decreased demand for greenhouse gas emission producing goods, increased demand for goods with lower emissions than competing products, increased competition for the development of new products, increased demand for renewable energy sources, or decreased demand for carbon-based energy source services.
- (d) Physical Impacts of Climate Change - Significant physical effects attributable to climate change may materially impact a company's business, thus triggering SEC disclosure requirements. Significant physical effects include, for example, rising sea levels, diminishing amounts of arable farmland, and decreasing water supply and quality. Material consequences of these significant physical effects include property damage and disruptions associated with rising sea levels, financial and operational disruptions resulting from floods or hurricanes, increasing insurance claims and liabilities, decreased agricultural capacity attributable to drought or other weather-related events, or increased insurance premiums or deductible/decreased availability of coverage.