On February 2, 2010, the Securities and Exchange Commission (SEC) issued an interpretive release (the "Guidance") addressing disclosure in SEC filings related to climate change issues. The Guidance was approved by the SEC by a 3-2 vote on January 27, 2010. The Guidance outlines the SEC's views with respect to its existing disclosure requirements as they apply to climate change matters and is intended to assist companies in satisfying their disclosure obligations under federal securities laws. The full text of the interpretive release is available at: http://www.sec.gov/rules/interp/2010/33-9106.pdf.
The Guidance references the non-financial statement disclosure rules that may require disclosure related to climate change and sets forth examples of instances in which companies should consider making climate change related disclosure. Climate change disclosure will most often be required pursuant to Regulation S-K and Regulation S-X, and, in particular, pursuant to the following:
- Reg. S-K Item 101 -- Business Description: Requires disclosure of material effects of environmental compliance on capital expenditures, earnings and competitive position of the registrant and its subsidiaries;
- Reg. S-K Item 103 -- Legal Proceedings: Requires disclosure of material pending legal proceedings related to environmental matters;
- Reg. S-K Item 303 -- Management's Discussion and Analysis (MD&A): Requires disclosure of known trends or uncertainties that the registrant expects will have a material favorable or unfavorable impact on net sales or revenues or income from continuing operations; and
- Reg. S-K Item 503(c) -- Risk Factors: Requires disclosure of material risks faced by the registrant, which include environmental factors.
The Guidance addresses the following specific topics, which may trigger disclosure pursuant to the foregoing rules and regulations.
Impact of Legislation and Regulation
The SEC advises that 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 and regulation related to this topic. Registrants should avoid generic risk factor disclosures that could apply to any company and instead should consider any specific risks they may face as a result of climate change legislation or regulation. For example, companies that are particularly sensitive to greenhouse gas regulation, such as those in the energy sector, may face materially different risks from climate change legislation than companies that are reliant on products that emit greenhouse gases, such as transportation companies.
In the context of MD&A disclosure, evaluating whether a known uncertainty (such as pending legislation or regulation) is required to be disclosed consists of two steps. First, management should evaluate whether the pending legislation is reasonably likely to be enacted. Second, management should determine whether the legislation, if enacted, is reasonably likely to have a material effect on the registrant, its financial condition or results of operations. The SEC notes that, in addition to disclosing the potential effect of pending legislation or regulation, the registrant would also have to consider disclosure, if material, of any difficulties involved in assessing the timing and effect of the pending legislation or regulation.
The SEC emphasizes that a registrant should not limit its evaluation of disclosure of the impact of environmental laws to negative consequences. When existing or pending laws could result in a favorable financial opportunity for a registrant (e.g., increased demand for a product or service), such a favorable consequence should be disclosed to the extent material.
Impact of International Accords
The SEC further recommends that a company consider, and disclose when material, the risks or effects on its business of international accords and treaties relating to climate change. The potential sources of disclosure obligations relating to such international accords are the same as those discussed above for U.S. climate change regulation. Companies whose businesses are likely to be affected by such agreements should monitor the progress of any potential accords and consider the possible impact in satisfying their disclosure obligations based on the MD&A and materiality principles discussed above.
Indirect Consequences of Regulation or Business Trends
The SEC observes that legal, technological, political and scientific developments regarding climate change may create new opportunities or risks for companies. For example, 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 from climate change related regulatory or business trends.
Other such possible indirect consequences or opportunities may include: increased competition to develop innovative products; increased demand for generation and transmission of energy from alternative energy sources; and decreased demand for services related to carbon-based energy sources, such as drilling services or equipment maintenance services. Another example of an indirect risk would be the impact of these business trends on a registrant's reputation. Depending on the nature of the registrant's business and its sensitivity to public opinion, a registrant may have to consider whether the public's perception of information related to its greenhouse gas emissions could expose it to potential adverse consequences to its business operations or financial condition resulting from reputational damage.
Physical Impacts of Climate Change
Finally, the SEC recommends that companies evaluate for disclosure purposes the actual and potential material impact of the physical effects of climate change, such as effects on the severity of weather, sea levels, the arability of farmland and water availability and quality, which may have the potential to affect a registrant's operations and results. For example, severe weather can cause catastrophic harm to physical plants and facilities and can disrupt manufacturing and distribution processes. Other possible consequences of severe weather could include: property damage and disruptions to operations for registrants with operations located on coastlines; indirect financial and operations impacts from weather-related disruptions (floods, hurricanes) to operations of major customers or suppliers; increased insurance claims and liabilities for insurance and reinsurance companies; decreased agricultural production capacity in areas affected by drought; and increased insurance premiums and deductibles, or a decrease in the availability of insurance coverage, for registrants in areas prone to severe weather or weather-related disasters.
The SEC emphasizes that the interpretive guidance does not impose any new disclosure requirements on public companies, but rather serves to remind companies of their obligations under existing federal securities laws and regulations with respect to climate change issues.
Chairman Mary Schapiro stated in her opening remarks that, "[w]e are not opining on whether the world's climate is changing, at what pace it might be changing, or due to what causes. Nothing that the Commission does today should be construed as weighing in on those topics. Today's guidance will help to ensure that our disclosure rules are consistently applied." Two Commissioners, Troy Paredes and Kathleen Casey, both appointed to the Commission by President Bush, dissented from the issuance of the Guidance for several reasons, including the possibility that the Guidance would foster uncertainty and confusion regarding required disclosure, the timing of the release and the use of Commission resources in light of significant issues facing the Commission, the unsettled science surrounding the causes and existence of climate change, and the appearance that the SEC, through the Guidance, was lending its support to a particular view of climate change.
The SEC intends to monitor the impact of the new interpretive guidance on company filings as part of its ongoing disclosure review program, and the SEC's Investor Advisory Committee is considering adding climate change disclosure issues as part of its overall mandate to provide advice and recommendations to the SEC. The SEC is planning to hold a public roundtable on disclosure regarding climate change matters in the spring of 2010.