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On January 27, 2010, the Securities and Exchange Commission (SEC) announced it will be providing interpretive guidance on SEC disclosure requirements on the issue of climate change. The guidance suggests the SEC has acknowledged concerns raised by some institutional investors and asset management firms that insufficient information about climate risk is available to investors.
According to SEC Chairman Mary Shapiro, "[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. Nothing that the Commission does today should be construed as weighing in on those topics. Today's guidance will help to ensure that our disclosure rules are consistently applied." The interpretive guidance was adopted in a 3-2 vote.
What the Interpretative Guidance Covers
SEC interpretive guidance neither creates new legal requirements nor modifies existing ones, but is intended to provide clarity and enhance consistency for public companies and their investors.
The new release will cover impacts that business or legal developments related to climate change may have on a company's business, and in particular disclosures related to a company's risk factors, business description, legal proceedings and management's discussion and analysis.
Specifically, the SEC's interpretative guidance highlights the following areas as examples of where climate change may trigger disclosure requirements:
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Impact of existing and pending laws and regulations;
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Impact of international accords and treaties;
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Indirect consequences of regulation or business trends; and
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Physical impacts of climate change.
What Companies Should Do
As many companies embark upon drafting their annual reports to shareholders and Form 10-Ks in 2010, companies should add an assessment of the materiality of climate change to the company's business. This may include a discussion of the topic within the company's disclosure controls committee or among the personnel responsible for disclosure in SEC filings. When assessing potential disclosure obligations related to climate change, companies should consider the impact of the following factors on its business:
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Potential direct effects of existing and pending climate change legislation, regulation, litigation and international accords and treatises;
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Potential indirect effects from legal, technological, political and scientific developments, such as changes in company reputation, demand for goods and services, and impacts on customers and suppliers;
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Potential physical impacts of climate change such as changes in availability of natural resources, hazards to facilities, property and equipment, disruption of distribution and manufacturing activities, etc.; and
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Potential increases in business costs resulting from increases in energy or other costs.
In conducting the assessment described above, management should consider whether it has an effective system for collecting information about greenhouse gas emissions and ensure it has sufficient information about its emissions profile and other operational matters to evaluate the likelihood of material impacts from greenhouse gas regulation or climate change.
A company may have made prior disclosures on climate change to entities such as regulators and/or voluntary greenhouse gas emissions reporting programs. In such cases, the company should make sure disclosures to the SEC are consistent with such prior statements (or be prepare to explain any discrepancies) and should note that such prior disclosures may not be adequate by SEC standards.
Even those companies that conclude that their businesses are not materially impacted by greenhouse gas regulation or climate change may decide to provide some disclosure about the assessment that resulted in such determination. This disclosure may be used to notify investors that the company is mindful of these issues, which may help to discourage shareholder proposals or other inquiries about the company's assessment on climate change.
Additional Resources
While the guidance applies to all companies in all industries, the materiality of climate change risks may have a disparate impact in certain industries. For example, based on data compiled by the Center for Energy and Environmental Security (CEES), the extent of climate change disclosure that has been provided historically has been greatest in the utility and energy industries.
CEES has published a database for searching for climate change disclosures in SEC filings. To view information about the frequency of such disclosures within various industries, visit coyote.climatepledges.org.
