On February 2, 2010, the U.S. Securities and Exchange Commission (the SEC) issued a formal interpretive release regarding existing disclosure requirements related to climate change. The interpretive release is effective immediately, so companies preparing their Annual Report on Form 10-K reports for the fiscal year ended December 31, 2009, should assess its relevance to their business operations. The SEC release identifies four items of Regulation S-K under which a company may be required to disclose matters related to climate change as they affect the company's business. The SEC also provides examples of certain of these disclosures.

Regulation S-K Items Relevant to Climate-Related Disclosure

Disclosure related to climate change may be required under Items 101 (description of business), 103 (legal proceedings), 303 (management discussion and analysis) and 503(c) (risk factors) of Regulation S-K.

Item 101 requires a company to discuss its business, including any material costs of complying with environmental laws. A smaller reporting company is required to disclose the costs and effects of compliance with environmental laws under Item 101(h)(4)(xi).

Item 103 requires a company to discuss any material pending legal proceeding to which it is a party. Specifically, Instruction 5 to Item 103 requires discussion of environmental litigation if (i) the proceeding is material to the business condition of the company; and either (ii) the proceeding involves a claim for monetary damages which exceeds ten percent (10%) of the company's current assets; or (iii) a governmental authority is a party to the proceeding that involves monetary damages, unless the company reasonably believes that monetary sanctions will be less than $100,000.

The broad range of disclosure items under Item 303 includes known trends, events and uncertainties that are both reasonably likely to occur and reasonably likely to have a material effect on a company's financial condition. While materiality qualifiers may limit the information that is actually disclosed, companies are cautioned that materiality should not limit the information that company management considers in making its determinations. Item 503(c) requires a company to discuss significant factors that make an investment risky or speculative. The SEC's release identified several examples of circumstances in which matters related to climate change may necessitate disclosure to fulfill these Regulation S-K obligations, as more fully described below.

Examples of Requisite Disclosures

Legislation and Regulation; International Accords#

A company should consider existing and pending federal, state and local legislation and regulations regarding climate change and whether the enactment of such regulation or legislation would have a material positive or negative effect on its business. If the legislation or regulation is reasonably likely to be enacted, and it is reasonably likely to have a material effect on the company's financial conditions or results of operations, disclosure is mandated. The evaluation of the impact of proposed laws or regulations need not only discuss negative consequences. For example, companies operating with lower emissions than competitors or companies that develop, manufacture, or sell green products may see an increased demand for goods or services due to customer preferences for green alternatives. A company should disclose, when material to its business, the reasonably likely impact of international treaties or accords relating to climate change.

Indirect Consequences of Regulation or Business Trends

Legal, political, technological and scientific developments related to climate change may create opportunities or risks for companies. For example, a company's reputation could be adversely affected by unusually high greenhouse gas emissions, while a competitor may be employing new technologies that reduce emissions. These circumstances could result in reduced demand for the company's product, thus necessitating a risk factor disclosure.

Physical Impacts of Climate Change

A company whose business may be vulnerable to climate-related events should disclose material risks associated with such events. The SEC's release uses floods, hurricanes, sea levels and arability of farmland as examples, but one can assume that earthquakes, tornados, drought and other natural disasters would also need to be considered. In addition, a company should consider and discuss these events as they relate to the company's insurance premiums, deductibles and overall ability to obtain insurance coverage.

Going Forward: Businesses More Concerned with Environmental Impact

Even though SEC regulations are designed to focus only on disclosure obligations, such requirements can have the indirect consequence of influencing decisions about business operations. Companies required to discuss matters pertaining to climate change may seek to minimize negative operational impacts resulting from relevant legislation, regulations, treaties and scientific developments. For example, to avoid disclosures that may result in negative public perceptions or reduced demand for products, companies may more readily consider alternative energy, emission offset programs and other policies. Such policy changes could be a boon for certain "green" businesses. In short, for some companies, disclosure obligations pertaining to climate change will present a challenge; for others, it presents an opportunity.