For the first time in at least 25 years, the United States Securities Exchange Commission (SEC) considered environmental issues in the context of its public disclosure requirements. On Wednesday, January 27, 2010, the SEC voted to issue interpretive guidance on disclosure requirements related to climate change. This decision responds to numerous requests by multiple state officials as well as environmental and investor groups for SEC action to clarify and/or strengthen requirements for reliable information regarding the impacts of climate change on public companies. The new guidance also comes on the heels of the highly publicized New York State prosecution of multiple companies regarding the adequacy of climate change-related disclosures and the penning of draft voluntary climate change disclosure standards by groups such as the Climate Disclosure Standards Board and ASTM International.
Significantly, the SEC’s guidance does not seek to impose new rules, obligations or requirements nor does it alter existing SEC disclosure requirements that already obligate companies to disclose trends, events and occurrences that may have a “material effect” on the company and to “fairly present” their financial condition in financial reports. Instead, the SEC intends this guidance to serve as simply a reminder and guide to companies to consider climate change issues as they prepare these required disclosures. While SEC interpretive releases are not technically legally binding, companies have learned that when a company fails to heed SEC interpretive guidance it can expect to receive comments on its disclosure from the SEC staff. As a result, we expect companies will consider carefully the SEC’s new climate change disclosure guidance in preparing their filings.
Specifically, the SEC’s guidance will focus on the following four areas that a public company may need to address in its disclosure if material to the company:
- the impacts of current and pending laws relating to climate change, including, without limitation, those laws regulating greenhouse gas (GHG) emissions;
- the effect of international treaties and accords relating to climate change (e.g., the Kyoto protocol);
- the direct and indirect consequences of climate change related regulatory or business trends (e.g., increased demand for fuel efficient vehicles, decreased demand for GHG intensive products); and
- the actual and potential effects from the physical impacts of climate change (e.g., floods, hurricanes, etc.).
The guidance will be released to the public once approved by the Office of Management and Budget. This story, however, is far from over. In the wake of proposed legislation and new requirements addressing climate change (e.g., EPA’s September 2009 GHG Reporting Rule), the SEC’s action highlights the importance of these issues in the current political climate. And, since the guidance will likely fail to respond to all concerns raised by the public in recent years, we may see future interpretive guidance by the SEC or even regulations on this topic. Stay tuned...