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Environmental Business Alert: SEC Issues Guidance on Climate Change Disclosures

Date: Feb 12, 2010

On February 2, 2010, the Securities and Exchange Commission ("SEC") issued an interpretive guidance intended to "remind" public companies of their obligations under current SEC disclosure rules "to consider climate change and its consequences" when preparing disclosures to be filed with the SEC and provided to investors.[1] The guidance purportedly breaks little new ground. As the SEC notes in its press release, "interpretive releases do not create new legal requirements nor modify existing ones, but are intended to provide clarity and enhance consistency for public companies and their investors."[2] The timing, however, is at best inopportune, coming as it does in the midst of the 10-K filing season.

The guidance responds to complaints by various investor groups and environmental organizations that climate change risks are inadequately or inconsistently disclosed by public companies. As the SEC intends to monitor the impact of the guidance on company filings, it seems likely that climate change-related disclosures will increase, further ratcheting the pressure on the Obama Administration and Congress to act on climate change.

Guidance on Climate Change Disclosures

The guidance first summarizes the development of standards governing the disclosure of "material" environmental issues in place since the 1970s. As the SEC notes, the Supreme Court's decision in TSC Industries v. Northway articulates the standard for materiality:

…information is material if there is a substantial likelihood that a reasonable investor would consider it important in deciding how to vote or make an investment decision, or, put another way, if the information would alter the total mix of available information. In the articulation of the materiality standards, it was recognized that doubts as to materiality of information would be commonplace, but that, particularly in view of the prophylactic purpose of the securities laws and the fact that disclosure is within management's control, "it is appropriate that these doubts be resolved in favor of those the statute is designed to protect."[3]

Next, the SEC describes the most pertinent non-financial statement disclosure rules that may require climate change-related disclosures. For example, Item 101 of Regulation S-K requires a business to disclose "the material effects that compliance with Federal, State and local provisions…relating to the protection of the environment, may have upon the capital expenditures, earnings and competitive position of the registrant and its subsidiaries." Instruction 5 to Item 103 describes the circumstances under which environmental litigation and administrative proceedings are not "ordinary routine litigation incidental to the business," and thus reportable. Rules governing the discussion of investment risk factors, Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A), and disclosure obligations of foreign private issuers also may implicate climate change reporting obligations.[4] Taking these existing requirements into consideration, the guidance discusses four ways in which climate change could trigger disclosure under these rules:

Impact of Legislation and Regulation

Existing Federal and state legislation and regulations governing climate change may trigger a host of disclosure obligations. For example, Federal or state restrictions on greenhouse gas emissions could trigger an obligation to disclose estimated material capital expenditures such as for environmental control technology.

In addition, however, the SEC expects public companies to consider the impact of pending legislation. According to the guidance, company management should first decide whether pending legislation is reasonably likely to be enacted. Unless management determines that a proposed legislation or regulation is not reasonably likely to be adopted, it must proceed on the assumption that the legislation or regulation will be enacted or promulgated. Next, the company must determine whether the legislation or regulation, if enacted or promulgated, is reasonably likely to have a material effect on the registrant, its financial condition or results of operations. Disclosures should not be limited to the negative and should include positive consequences of a proposed law or regulations, such as the opportunity to profit from the sale of cap-and-trade allowance.

Impact of International Accords

Companies also should consider and disclose, when material, the impact of climate change treaties or international accords on their business. According to the guidance, potential sources of disclosure obligations from international accords are the same as those from U.S. climate change requirements. Thus, public companies that reasonably are likely to be affected by such agreements or treaties should monitor their progress and consider the possible impacts in satisfying their disclosure obligations, taking into consideration the materiality principles discussed in the guidance.

Indirect Consequences of Regulation or Business Trends

Indirect consequences that may result from climate change regulatory or business developments also should be considered as potential risk or opportunity factors. These developments can consist of legal, technological, political or scientific trends that could create new opportunities or risks for companies. The guidance identifies the following as possible indirect consequences or opportunities that should be considered and possibly disclosed:

  • Decreased demand for goods that produce significant greenhouse gas emissions;
  • Increased demand for goods that result in lower emissions than competing products;
  • Increased competition to develop innovative new products;
  • Increased demand for generation and transmission of energy from alternative energy sources; and
  • Decreased demand for services related to carbon based energy sources, such as drilling services or equipment maintenance services.

The SEC notes that companies also may be required to disclose the impact to their reputation from climate change developments. Depending on the nature of a business and its sensitivity to public opinion, a company may need to consider "whether the public's perception of any publicly available data relating to its greenhouse gas emissions could expose it to potential adverse consequences to its business operations or financial condition resulting from reputational damage."

Physical Impacts of Climate Change

Lastly, the SEC recommends that companies whose business may be vulnerable to severe weather or climate-related events consider disclosing the material risks of, or consequences from, such events in their publicly filed disclosure documents. In particular, the SEC identified the following as possibly reportable consequences of severe weather:

  • Property damage and disruptions to operations, including manufacturing operations or the transport of manufactured products, for companies with operations concentrated on coastlines;
  • Indirect financial and operational impacts from disruptions to the operations of major customers or suppliers from severe weather, such as hurricanes or floods;
  • Increased insurance claims and liabilities for insurance and reinsurance companies;
  • Decreased agricultural production capacity in areas affected by drought or other weather-related changes; and
  • Increased insurance premiums and deductibles, or a decrease in the availability of coverage, for registrants with plants or operations in areas subject to severe weather.

SEC Next Steps

The SEC announced its intent to monitor the impact of its climate change guidance on company filings as part of an ongoing disclosure review program. In addition, the Commission's Investor Advisory Committee is considering climate change disclosure issues as part of its overall mandate to provide advice and recommendations to the Commission. The Commission plans to hold a public roundtable on climate change-related disclosures in the spring of 2010. Based on its experience with the disclosure review program, any advice or recommendations from the Investor Advisory Committee and any information obtained through the roundtable, the SEC will consider whether any "further guidance or rulemaking relating to climate change disclosure is necessary or appropriate in the public interest or for the protection of investors."

For more information on the SEC guidance or climate change events likely to trigger a disclosure obligation, please contact JC Walker (202) 434-4181 or walker@khlaw.com.


[1] 75 Fed. Reg. 6290 (February 8, 2010); also available at http://www.sec.gov/rules/interp/2010/33-9106.pdf.

[3] Commission Guidance Regarding Disclosure Related to Climate Change, http://www.sec.gov/rules/interp/2010/33-9106.pdf. See TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438 (1976); Basic Inc. v. Levinson, 485 U.S. 224 (1988).

[4] Item 503(c) of Regulation S-K, Item 303 of Regulation S-K and Form 20-F, respectively. See 17 C.F.R.§ 229.503(c); 17 C.F.R.
§ 249.220f.