Will climate change, or governments’ response to it, have a material impact on your business? Companies with a public reporting obligation that have not yet addressed that question were recently reminded by the Securities and Exchange Commission (SEC) that they need to.
On February 10, 2010 in a split decision along party lines, the SEC issued an Interpretive Release providing clarification of obligations related to material financial risks relating to climate change. (The 29-page Release is available at http://www.sec.gov/rules/interp/2010/33-9106.pdf). The SEC’s guidelines do not alter any existing legal requirements, but instead clarify the climate related developments that must be considered, along with other financial risks. The Release identified a non-exclusive list of four areas of climate related risks that may trigger reporting requirements:
- Impact of legislation and regulation (including positive consequences, e.g., profits from sales of allowances or credits under a “cap-and-trade” system);
- Impact of international accords (e.g., Kyoto and the UN Convention on Climate Change);
- Indirect consequences or opportunities of regulation on business trends (e.g., increase or decrease of demands for existing products or services); and
- Physical impacts (e.g., where sea levels or severe weather may materially impact operations).
The Release also reviewed provisions of existing Regulation S-K under which climate change risks would be reported, including: Item 101 (requiring disclosure of material effects on capital expenses, earnings and competitive position, as well as disclosure of material estimated capital expenditures for environmental controls); Item 103 (requiring description of material pending legal proceedings, as well as governmental proceedings involving potential monetary sanctions exceeding US$100,000); Item 303 (requiring disclosure of known trends, material events and uncertainties); and Item 503 (requiring description of “risk factors”).
The practical significance of the Release is unclear, other than as an indication of the SEC’s view of factors that a reporting company should consider in evaluating the need to disclose material impacts of climate change. The Release offered no guidance on how a company is to resolve the complex, uncertain and often conflicting views of “facts” that must be ascertained in evaluating the likelihood or materiality of climate change impacts – including potential “physical impacts” such as sea-level change or extreme weather events. In announcing the Release, SEC Chairman Mary Schapiro noted “[w]e are not opining on whether the world’s climate is changing, at what pace it might be changing, or due to what causes.”
Shortly after the Release was issued, ASTM International published a “Standard Guide for Financial Disclosures Attributed to Climate Change”, E2718-10, approved March 15, 2010, “to provide a series of options or instructions consistent with good commercial and customary practice for climate change-related disclosures accompanying audited and unaudited financial statements.” The ASTM Guide is intended for use on a voluntary basis in determining whether a disclosure is warranted, and to assist in determining the content of disclosure, as a supplement to any other requirements imposed by law, regulations or contract. The ASTM Guide closely parallels the language of the Release, and reviews factors that should be considered, although it provides little if any additional guidance on how to resolve the many uncertainties in evaluating potential climate change impacts.
While climate change is only one of many events that could have a material impact on a reporting company, it was singled out by the SEC partly in response to continuing pressure from a variety of groups seeking to improve corporate environmental policies. For example, in 2008 and again in 2009, interested parties filed petitions with the SEC to issue interpretive guidance on climate change disclosure. In issuing the Release, the SEC indicated that it may initiate additional guidance or rulemaking on climate change disclosures this year. In short, the SEC and interest groups will likely maintain a heightened focus on climate change disclosure for the foreseeable future.
In view of the Release and the continuing attention of the interest groups that helped prompt it, public reporting companies that might be significantly affected by climate change should to take a fresh look at their disclosure procedures to ensure that they have considered the issues the Release raised. Among other things, those companies will want to ensure they have a system in place to monitor legislative and regulatory changes at all governmental levels, and to periodically re-evaluate the assumptions underlying their disclosure positions.