Certain Climate Change Disclosures May Be Required Under SEC Regulations

In the shadow of the Environmental Protection Agency's ("EPA") proposed rule for emission reductions for existing power plants, maintaining the appropriate scope and detail of environmental disclosures as related to climate change is under a spotlight for companies subject to the Security and Exchange Commission's ("SEC") disclosure regulations. While there are currently no mandatory medium- or long-term greenhouse gas emission reduction and limited regulations related to greenhouse gasesin the United States, public companies with an international footprint are already subject to emissions reduction targets and climate change regulations that affect capital expenditures, earnings, and the competitive position of their business. Thus, an understanding of the SEC's disclosure requirements in the context of climate change is certainly necessary for some public companies and increasingly necessary for the rest.

As Regulation S-K provides the basic instructions and minimum requirements for various SEC filings, it is the starting point for evaluating a public company's disclosure obligations as related to climate change. Beginning with Item 101, Description of Business, a public company must evaluate the implications of climate change and associated regulation of greenhouse gases on disclosures. Item 101 requires a narrative description of the company's current and intended business. This description includes the "material effects" of environmental compliance on capital expenditures, earnings, and competitive position. The rule specifically states that the company must "disclose material estimated capital expenditures" for the current fiscal year and the next fiscal year. In 2010, a 3–2 split by the vote of five SEC commissioners emphasized that the requirements in Item 101 and other portions of Regulation S-K can require a company to delineate climate change considerations. The capital expenditures associated with the installation of emission control equipment, such as the carbon capture and sequestration equipment contemplated under EPA's emission reduction rule for power plants, are just one example of disclosures required under Item 101.

Under Item 103, Legal Proceedings, climate change implications and regulation of greenhouse gases may also be required to be disclosed. Item 103 requires disclosure of administrative or judicial proceedings under environmental laws if: (i) those proceedings are material, (ii) the claims exceed 10 percent of current assets, or (iii) the government is a party (unless the company has reasonable belief that monetary sanctions will be under $100,000). Involvement in climate change litigation brought under the citizen suit provisions of environmental laws could create a disclosure obligation for a public company.

Regulation S-K includes Item 503(c), Risk Factors, which requires certain SEC filings to include a discussion of the most significant factors that make an investment in the regulated company speculative or risky. The SEC requires risk factor disclosure to clearly state the risk and specify how the particular risk affects the particular registrant. In the context of climate change, risk factors vary from the impact of legislation and regulation to the actual physical impacts of climate change from catastrophic weather events and pervasive climate conditions that may affect asset value or business operations. When they are significant to a registrant, these risk factors should be disclosed to meet the disclosure requirements of Item 503(3).

In addition to the climate change-related matters identified for possible disclosure under Item 101, Item 103, and Item 503(c), Item 303, Management Discussion and Analysis ("MD&A"), requires the disclosure of other information necessary to understand the company's financial condition, including known trends or uncertainties likely to change liquidity in any material way. The extent of the disclosures required under MD&A have not been tested in the context of climate change. However, two key SEC interpretations in the context of disclosing potentially responsible party status ("PRP") in Superfund matters offer clarity. First, the Thomas A. Cole, SEC No-Action Letter (Jan, 17 1989), explains that a known uncertainty exists "where it is reasonably likely that these [clean-up] costs will be material." Second, the MD&A Interpretive Release dated May 18, 1989 explains that there is a duty to disclose where uncertainty is known and reasonably likely to be material. In the example context of PRPs, the guidance explains that MD&A disclosure is required where "management is unable to determine that a material effect … is not reasonably likely to occur" considering the company's aggregate potential share of cleanup costs and the availability of insurance coverage. 

This MD&A guidance language suggests that a public company grappling with making a disclosure related to climate change should default on the side of disclosure. In making its determination about the necessity of climate change disclosure, the company should consider the aggregate costs posed by the various risks associated with climate change and regulation of greenhouse gas emissions. Even as a company considers the aggregate costs, it should also consider mitigating factors such as insurance. Similarly, a public company may want to consider discussing any competitive advantage offered by climate change or regulation of greenhouse gases.

Companies that make the required disclosures are not necessarily insulated from shareholder activism. In recent years, shareholders have proposed resolutions for companies to develop reports on greenhouse gas emissions and consider establishing targets for future reductions. In some cases, companies have successfully resisted including these shareholder resolutions in proxy materials when the companies can point to existing measures that accomplish the same functional objectives as the proposed resolution would. In other cases, the SEC has taken action that leads to inclusion of the shareholder resolution in proxy materials.

Shareholder Resolutions Pressure Corporations to Disclose Plans for Climate Change

A large coalition of shareholders in several energy companies has recently published resolutions focused on provoking corporate responses to climate change. In early 2015, 150 investors in BP Plc ("BP") and Royal Dutch Shell Plc ("Shell") published resolutions with the two companies demanding several responses. Specifically, the resolutions call for the companies to: (i) test whether their business models are compatible with the "2C target," the international community's pledge to limit global warming to two degrees on the centigrade scale (3.6 degrees Fahrenheit); (ii) restructure the corporate bonus systems to no longer reward climate-harming activities; (iii) commit to reducing emissions and investing in renewable energy; and (iv) disclose how their public policy plans align with climate change mitigation and risk. These measures will be put to a vote at BP and Shell's annual general meetings ("AGM"), in April and May 2015, respectively. In a January 29, 2015, letter to the shareholder coalition regarding the resolution, Shell stated its intention to recommend that shareholders support the resolution at its AGM. 

The BP and Shell resolutions are notable for the size of the investors involved in the coalition. One of the driving forces behind the resolutions was the "Aiming for A" investor coalition, organized by CCLA Investment Management, a charity fund manager. The "Aiming for A" coalition was established with the goal of engaging with the 10 major UK-listed utilities and extractives companies to earn an "A" in the Carbon Disclosure Project's Carbon Performance Leadership Index. The BP and Shell resolutions are the first shareholder resolutions published by the coalition.

CCLA manages, among other things, more than US$2.35 billion of Church of England money. The full co-filing group in the BP and Shell resolutions comprises more than 50 institutional investors, including UK churches, charities, and local authority pension funds, as well as clients of Rathbone Greenbank Investments and individual supporters. Eight of the co-filing pension funds have assets higher than US$15 billion. The co-filing group is being assisted by ClientEarth, an environmental law firm, and ShareAction, a shareholder action group

The kind of shareholder resolutions filed with BP and Shell are becoming increasingly common. According to Ceres, more than 100 similar resolutions related to climate change, carbon asset risk, and greenhouse gas emissions have already been published for 2015. The actions requested by these types of resolutions take many forms. Proposed resolutions were filed with several large banks, urging the banks to disclose information about the loans they make to "oil, gas, coal and other companies whose practices create carbon emissions." 

As previously reported in the Fall 2014 Climate Report, multiple shareholder proposals by state pension funds in New York and Connecticut were filed in 2014 with five energy companies, requesting that they (i) report on their progress in achieving the Obama administration's goal of an 80 percent reduction in greenhouse gas emissions by 2050, (ii) consider innovative energy generation technologies and strategies, and (iii) evaluate best practices among domestic and international peers. More recently, the Vermont Pension Investment Committee approved the co-filing of a resolution asking ExxonMobil to report to shareholders by the end of November 2015 about its plans for reducing total greenhouse gas emissions from its products and operations. And a resolution filed in November 2014 with ExxonMobil called for the company to return capital to shareholders rather than invest in high-cost, high-carbon oil projects. 

As coalitions such as "Aiming for A" become increasingly active, the number of resolutions, and the amount of assets implicated, can be expected only to grow.