On February 2, 2010, the Securities and Exchange Commission (SEC) released interpretive guidance on disclosures related to business or legal developments surrounding climate change that are required of public companies. The interpretive guidance follows from a January 27 decision in which the SEC voted 3-2 to provide guidance on the subject.
The interpretive guidance focuses on four distinct areas in which climate change may trigger reporting requirements under existing disclosure requirements for public companies in Regulation S-K and Regulation S-X. Specifically, these areas are:
- Impact of Pending Legislation—the material impacts of existing laws and regulations, and the potential impact of pending legislation, regarding climate change.
- Impact of Potential International Accords—the risks or effects on business of international accords relating to climate change.
- Indirect Consequences of Regulation or Business Trends—new opportunities or risks associated with various legal, political, and market developments associated with climate change.
- Physical Impacts of Climate Change—the effects physical environmental changes resulting from climate change may have on a business.
The SEC further identified particular disclosure rules that may require certain companies to include climate change related disclosures and provided examples of factual circumstances that may require certain companies to make disclosures regarding the impacts or potential impacts of climate change on their business. The existing disclosure requirements and associated representative circumstances that might trigger disclosure include:
Description of Business — Regulation S-K, Item 101: disclosure of the costs of complying with environmental laws.
- Disclosure of any material estimated capital expenditures for emissions controls or other environmental control facilities required by federal, state or local laws governing greenhouse gas emissions.
- Disclosure of how potential industry or market developments resulting from climate change could cause a business to shift its operations to take advantage of an opportunity or avoid a consequence.
Legal Proceedings — Regulation S-K, Item 103: disclosure of material pending legal proceedings to which it or a subsidiary is a party, including environmental litigation.
- Disclosure of pending litigation for failure to comply with laws and regulations regarding climate change.
Risk Factors — Regulation S-K, Item 503(c): requiring a discussion of the most significant risk factors that make an investment in the company speculative or risky.
- Disclosure of unique or specific risk factors associated with any pending climate change legislation, regulation or international accord, such as for industries highly susceptible to such legislation and regulation, like the energy sector.
- Disclosure of the risk to business operations or reputation from potential changes in the industry or market as a result of climate change.
Management’s Discussion and Analysis (MD&A) —Regulation S-K, Item 303: requiring a narrative covering a broad range of disclosure items surrounding management’s view of the company’s financial condition and prospects.
- Disclosure of management’s analysis of whether pending legislation, regulation or international accord is likely to have a material effect (including both negative and positive effects) on the company’s financial condition or operations.
- Disclosure of management’s analysis of how industry or market changes resulting from climate change impact their view of the company’s financial condition and prospects.
While the interpretive guidance does not create new legal requirements or modify existing requirements, it does demonstrate that the SEC acknowledges that climate change currently has, and likely will continue to have, material impacts on certain businesses, and that investors have a right to disclosure of such information.
The purpose of the SEC’s interpretive guidance is simply to provide clarity, increase understanding and enhance consistency of disclosures, and therefore is not designed to represent an exhaustive list of disclosure requirements related to climate change.