As anticipated, the U.S. Securities and Exchange Commission ("SEC") voted 3-2 yesterday to release interpretive guidance regarding climate change disclosure by public companies. The guidance clearly signals the SEC's heightened expectation regarding climate change disclosure. However, issuers may find that the guidance raises more questions than it answers.

SEC Chairman Mary Shapiro was careful to emphasize that yesterday's release constitutes guidance, not an amendment to existing disclosure rules. She also noted that the SEC was expressing no view regarding the existence, pace or causes of climate change. This caveat reflects the highly politicized nature of the climate change issue in the U.S. Despite the "political sensitivity" of the issue, the SEC's guidance is intended to ensure that "disclosure rules are consistently applied...so that investors get reliable information."

The guidance, which is not yet available on the SEC website but is summarized in a press release, highlights that the following four issues may require disclosure:

  • "Impact of Legislation and Regulation: 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.
  • Impact of International Accords: A company should consider, and disclose when material, the risks or effects on its business of international accords and treaties relating to climate change.
  • Indirect Consequences of Regulation or Business Trends: Legal, technological, political and scientific developments regarding climate change may create new opportunities or risks for companies. For instance, 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 due to climate change related regulatory or business trends.
  • Physical Impacts of Climate Change: Companies should also evaluate for disclosure purposes the actual and potential material impacts of environmental matters on their business."

Interestingly, the guidance does not provide any guidance as to when companies should disclose actual emissions data. Presumably, it will be left to the issuers to determine when this level of detail is material.

Particularly challenging will be the call to disclose the impact of "pending legislation and regulation", the "potential indirect consequences it may due to climate change related regulatory or business trends", and " potential material impacts of environmental matters on their business". This type of speculative disclosure begs several questions: To be material, do pending legislation or potential consequences have to be possible, probable or certain? How are companies expected to assess the probability and likely magnitude of the impact of future contingent events? On whose assessment may they rely? What happens if an issuer provides disclosure based on speculation today that proves to be wrong tomorrow?

Given that these questions remain unanswered, we expect that any disclosure provided in response to the new SEC guidance will be heavily qualified. We also expect that many companies will rely heavily on professional advisors to assist with this speculation. Issuers will no doubt proceed cautiously when preparing climate change disclosure this year. They will have to balance the need to say something that takes the new guidance into account with the risk of saying something that harms share prices and is later found to have been unfounded or unnecessary to disclose.

As discussed in a previous posting, the SEC's guidance will certainly be taken into consideration by the Ontario Securities Commission as it develops its own climate change disclosure guidance in time for the 2010 annual report season.