SEC Issues Guidance on Climate Change Disclosure

February 4, 2010
MGKF Special Alert

On February 2, 2010, the Securities and Exchange Commission ("SEC") ; released and posted on its website the anticipated new interpretive guidance document outlining the SEC's position on existing federal securities laws and regulations that could require public companies to include climate change related disclosures in their financial reporting.  The SEC had announced its approval of the new interpretive guidance during its January 27, 2010 Commission meeting as discussed in our prior alert "SEC Approves Guidance on Climate Change Disclosure."  The interpretive guidance will become effective upon publication in the Federal Register, which is anticipated shortly.  While the SEC is not creating new rules through this guidance, it is for the first time providing express direction to the regulated community on when existing disclosure requirements may obligate companies to disclose business or legal developments related to climate change.  The disclosure requirements addressed in the new interpretive guidance are directly applicable to public company disclosures pursuant to SEC regulations.  The principles and issues discussed in the guidance, however, are similar to issues and risks many private companies may also face with respect to reporting efforts associated with greenhouse gas emissions or sustainability reporting.

The guidance first generally describes recent regulatory, legislative and other developments related to climate change, the potential impact of climate change issues on public companies, the current sources of climate change disclosures by public companies, and the historical background of environmental disclosures under SEC regulations. ; With respect to those disclosures, the guidance highlights the development of the materiality standard applicable to all disclosures, i.e. that information is material and should be disclosed if a reasonable investor would consider the information important in making an investment decision, or alternatively, it would alter the total mix of available information. ; The new climate change disclosure guidance does not change this materiality standard.

The guidance next provides an overview of the current SEC rules that could require disclosure of climate change issues, focusing on the requirement to disclose costs of complying with environmental laws (Item 101), the requirement to describe material legal proceedings to which it is a party (Item 103), the requirement to describe factors that make an investment in the registrant speculative or risky (Item 503(c)), and the requirement to identify and disclose known trends, events, demands commitments and uncertainties that are reasonably likely to have a material effect on financial condition or operating performance (Item 303). ; The guidance then highlights four topics that could trigger disclosure under these rules: (1) the impact of existing and pending laws and regulations related to climate change; (2) the impact of international climate change accords; (3) indirect consequences of regulations or business trends (e.g., whether climate change developments could lead to an increase or decrease in demand for certain goods); and (4) the actual and potential physical impacts of climate change on the business.

Within this framework, the SEC guidance highlights a number of important issues that will likely arise with respect to climate change disclosures, including:

  • Voluntary reporting: ; The guidance notes that many companies currently provide information concerning their "carbon footprint" (and efforts to reduce this footprint) under various voluntary disclosure programs (e.g., The Climate Registry, The Carbon Disclosure Project, The Global Reporting Initiative). ; SEC regulations, however, may require disclosure of similar information, which in turn raises issues about consistency between the voluntary and mandatory reporting efforts.
  • Reputational Damage: ; One of the indirect consequences of climate change that a company may need to disclose in filings is the extent to which the public’s perception of publicly available data related to a company's greenhouse gas emissions could result in adverse consequences.
  • Insurance issues: ; When looking at physical impacts associated with climate change, insurance companies should consider the possibility of an increase in weather related claims. ; Conversely, companies with operations subject to severe weather should consider the effect of increased insurance premiums and deductibles.
  • Pending legislation and regulation: ; Under current SEC rules, when evaluating whether the effects of pending climate change legislation or regulation must be disclosed, the registrant must first evaluate whether the legislation or regulation is likely to be enacted. ; But unless it is determined that the legislation/regulation is not reasonably likely to be enacted, the company must proceed on the assumption that the legislation/regulation will be enacted. ; Given the shifting sands in Washington these days, performing this evaluation may require careful analysis by outside professionals tracking these developments.
  • Opportunities: ; Companies should also disclose the opportunities that new climate change legislation and/or regulation could provide. ; For example, some companies may be able generate additional revenue in a "cap and trade" system. ; Other companies may find an increased demand for their "lower emitting" products, or may wish to make material changes to their business to take advantage of these opportunities.

The list above includes only some of the items companies could face when evaluating the sufficiency of their climate change disclosures in their public filings. ; And, as noted above, ; while the guidance is only directly applicable to public company disclosures, many private companies either currently or may in the future address similar issues in the context of climate change disclosures and representations in private transactions, sustainability reporting, and "green" claims. ; Accordingly, how the climate change issues play out with respect to SEC disclosures will undoubtedly influence how such issues are treated in these private settings.

If you have any questions about the SEC's interpretive guidance, or any other issue related to developing climate change legislation and regulation, please contact Todd Kantorczyk at 484-430-2359 or or any other member of Manko, Gold, Katcher & Fox's Sustainability Practice Group.