On Jan. 27, 2010, the United States Securities and Exchange Commission (SEC) voted 3-2 to clarify that environmental compliance requirements, environmental risks, and potential future regulations, as well as how these developments may affect profitability and business developments, must be included in annual filings to the SEC.
The SEC announced that it will issue an interpretive release providing guidance to publicly traded companies on the SEC’s existing disclosure requirements as they apply to business or legal developments relating to climate change. The release will clarify the type of information that publicly-traded companies must disclose to investors in terms of climate-related “material” effects on business operations. The release may result in publicly-traded companies more consistently disclosing greenhouse gas emission inventories and climate risk analyses.
Federal securities laws and SEC regulations require certain disclosures by public companies for investors’ benefit. To assist those who provide such disclosures, the SEC provides the business and investment communities with guidance on how to interpret the disclosure rules. The SEC’s interpretive releases do not create new legal requirements or modify existing ones, but are intended to provide clarity and enhance consistency for public companies and their investors.
The release will clarify certain existing disclosure rules that may require a company to disclose the impact that business or legal developments related to climate change may have on its business. The relevant rules cover a company's risk factors, business description, legal proceedings, and management discussion and analysis.
In describing the release, the SEC noted that the following areas are examples of issues where climate change may trigger disclosure requirements:
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 also should 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 changerelated regulatory or business trends.
Physical Impacts of Climate Change: Companies also should evaluate for disclosure purposes the actual and potential material impacts of environmental matters on their business.
The current SEC rules and regulations require companies to disclose items that are “material” to investors, and nothing in the announcement indicates that the SEC is changing the traditional standard for materiality, which is a “substantial likelihood that disclosure would be viewed by the reasonable investor as having significantly altered the total mix of information made available.”
Some commentators have expressed concern that companies now may be required to speculate on what legislation will pass and what its consequences may be. There is also concern that disclosure on the four topics listed above would include a great deal of speculation and may lead to more – not less – investor confusion. Those opposing the adoption of the interpretive release noted the great flux in the science, law and policy that addresses climate change.
More disclosure about climate change issues seems to be a growing trend. For example, the United States Environmental Protection Agency’s (EPA) new mandatory greenhouse gas (GHG) reporting rule requires some facilities that are large emitters of GHGs to report those emissions to EPA. Such facilities must begin data collection on Jan. 1, 2010. In addition, the National Association of Insurance Commissioners (NAIC), the national organization of insurance regulators, unanimously approved a mandatory requirement for insurers with premiums of $500 million or more to disclose climate risks to regulators, shareholders and the public beginning in May 2010.
There has been a growing number of climate change disclosure cases, as well as subpoenas issued by New York’s Attorney General in September 2007 to five of the nation’s largest power companies regarding their climate change disclosure in SEC filings. Those subpoenas requested internal documents for an investigation on whether the companies adequately disclosed the financial risks of carbon dioxide emissions from new coal-fired power plants. The office of the New York Attorney General indicated that the companies may be affected financially if lawmakers place controls on coal-fired plants that emit carbon dioxide. Three of those cases have been settled, including one major settlement in November 2009, in which the companies agreed to boost their disclosure.
Companies subject to the SEC reporting rules should carefully draft their disclosures to provide investors with useful information about the potential risks and implications of climate change. The SEC's interpretive release has not yet been posted on the SEC’s Web site. When the SEC’s interpretive release is public, we will provide a more detailed analysis of the SEC’s interpretive guidance and the practical impact of such guidance on public companies.