On Tuesday, February 2, 2010, the SEC released its Guidance Regarding Disclosures Related to Climate Change. In addition, in comments made by the Commission in connection with the adoption of the guidance, the SEC advised that it will be focusing on climate change disclosure in its reviews of company filings.
Starting on January 1, 2010, most large industrial concerns in the United States had to begin tracking the amount of greenhouse gases emitted by their businesses under new EPA requirements. According to the SEC, this and a number of current and anticipated state, national and international climate change initiatives led to its decision to clarify the obligation of public companies to disclose and discuss the potential impact of climate change activities in their public filings.
As a result, on January 27, the Commissioners, in a 3-2 vote, adopted the guidance, but delayed releasing the full text until February 2, 2010. The guidance was issued in response to a petition of several investors in 2007 (supplemented in 2008 and 2009) that sought from the SEC guidance as to how reporting companies should disclose the possibility of material effects from climate related events, legislation, regulation and international accords. The Commission also noted that it was concerned that a number of reporting companies were voluntarily providing climate change data to third parties (such as the Climate Registry or the Carbon Disclosure Project), and the Commission wanted to ensure that similar disclosures were made in SEC filings, if merited under SEC rules and regulations.
The guidance notes that the source of the reporting obligation to disclose material items related to climate change that might affect a reporting company is the Commission's existing Regulations S-K and S-X, as well as Securities Act Rule 408, and Exchange Act Rule 12b-20 (and, with respect to foreign private filers, Form 20- F’s similar disclosure requirements). Hence, the guidance is being issued for clarification purposes, and does not, in the Commission's view, represent new obligations for reporting companies. Nonetheless, the guidance provides a roadmap as to which sections within a report climate change implications should be considered.
At the outset, with respect to the discussion in the Management’s Discussion and Analysis section of any filing (MD&A), the guidance reiterates that the standard to apply with respect to the "reasonable likelihood" that some event or uncertainty may have a material effect on the reporting company is a lower threshold than "more likely than not." The Commission, however, presents this standard in the negative. That is, if a known trend, event or uncertainty, including the possible passage of pending legislation or additional regulation, cannot be excluded as not reasonably likely to occur, then management must evaluate the consequences of the known trend, event or uncertainty on the financial condition or results of operations of the reporting company on the assumption that it will come to fruition. For example, unless a company can conclude that it is no longer reasonably likely that cap and trade legislation or regulation, either at the state or federal level, will come to pass within a relevant timeframe, then management must evaluate the potential consequences on the reporting company as if the legislation or regulation will come into effect when determining if the impact would likely be material. Nonetheless, management may still determine that such legislation or regulation, if enacted, would not have a material impact on the reporting company, and thus choose to exclude a discussion of its impact on the reporting company.
The SEC then presents several examples of climate change related issues which may warrant disclosure, and the regulatory basis for such disclosures and the relevant section of a filing in which such disclosures may be made.
Click here to view the the table.
By virtue of its guidance, the SEC has clarified its position that reporting companies need to consider climate change, and possible legal, legislative and regulatory responses to the perception of climate change, as subjects to be discussed in their disclosure committees and by management in connection with all future relevant filings, such as registration statements and periodic reports, to which such disclosures may apply.