SEC Issues Interpretive Guidance on Climate Change Disclosure Requirements for Public Companies

On February 2, 2010, the Securities and Exchange Commission (SEC) published a new interpretive document (the Guidance) intended to inform public companies on their obligation to disclose to investors the impacts on their businesses – both positive and negative – of existing and proposed climate change laws and regulations. The Guidance also instructs companies to assess and disclose the impact to their businesses of possible physical changes to the environment due to climate change. In a January 27, 2010, press release announcing the Commission’s decision to issue of the Guidance, the SEC noted that its “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.” Although the Guidance is not a new rule or regulation, SEC guidance is generally treated as binding. The Guidance is effective upon publication in the Federal Register.

I. Background

Climate change poses a wide range of new business risks for publicly traded companies and their investors.[1] The rapidly growing array of federal, state, and local climate change regulations, including Congressional proposals for a national cap-and-trade program, has created significant regulatory (and economic) uncertainty for businesses in all sectors of the economy, particularly businesses with energy-intensive operations. The possible physical changes attributable to global climate change, such as rising sea levels and altered weather patterns, pose new risks to companies’ infrastructure and natural resource assets. Businesses are also faced with a changing commercial environment and the prospect of increased energy and insurance costs.

In light of these emerging business and investment risks, an increasing number of companies have been incorporating climate change issues into their SEC disclosures. The number of companies that have mentioned climate change in their SEC filings has increased from 26% in 2000 to 49% in 2005.[2] The SEC has been under increasing pressure to clarify how and when companies should disclose climate change-related risks. In 2007, for example, a group of investors and state government officials petitioned the SEC to publish guidance clarifying that climate disclosures are required under existing regulations.[3] Two years later, a coalition of investors managing over $1.4 billion in asset requested that the SEC expand disclosures requirements associated with climate change risks.[4]

II. SEC’s Guidance

SEC’s Guidance responds to investors’ growing concerns about climate risks, and provides a roadmap for evaluating such risks under existing SEC regulations. The Guidance does not change the standard of “materiality” for determining when environmental liabilities must be disclosed. Under SEC Regulations S-K[5], “material” information regarding environmental liabilities must be disclosed in periodic filings with the SEC and in public offering disclosures. Under the Supreme Court’s seminal TSC Industries v. Northway decision, information is “material” if it would be important to a reasonable shareholder or investor, or if it would “significantly alter[] the total mix of information available.”[6] Instead, the Guidance “outlines [the SEC’s] views with respect to … existing disclosure requirements as they apply to climate change matters.”

The Guidance first identifies existing SEC rules that may require disclosure related to climate change. For example, the costs and effects of complying with environmental laws, including state and federal climate change laws, must be disclosed as part of a registrant’s description of its business. Environmental litigation that is material to the registrant’s business or financial condition must also be disclosed. Litigation-related disclosure obligations are of particular note to utilities, carbon-based fuel producers, and other energy-intensive industries in light of pending climate change tort cases. See Marten Law Environmental News, Before the Deluge: Fifth Circuit Joins Second Circuit in Allowing Climate Change Tort Suits, while District Court Dismisses Similar Claims (Nov. 4, 2009). Rules pertaining to investment risk factors and the Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) may also compel disclosures regarding climate change.

The Guidance then discusses four principal ways climate change may present material risks which trigger disclosure obligations under existing SEC rules.

(A) Impact of Legislation & Regulation

Rapidly developing state and federal climate change legislation and regulation may trigger a broad array of disclosure obligations. For example, registrants must disclose estimated capital expenditures for environmental controls, which could include stack controls to regulate greenhouse gas emissions. Registrants must also assess the extent to which climate change regulations or legislation is likely to have a material effect on the registrant’s financial condition.

Pending climate change legislation may also trigger disclosure obligations. When evaluating uncertain risks such as pending legislation, registrants must evaluate the likelihood that the legislation will be passed, and whether it is reasonably likely to have a material effect on their financial conditions or operations. Possible consequences of pending legislation and regulation include costs (or profits) associated with buying (or selling) emission allowances under a cap-and-trade program; costs necessary to modify facilities in order to comply with emission limitations; and the direct and indirect changes to profit and loss associated with changing demand for goods and services.

(B) International Accords

Registrants must also disclose material impacts on their businesses attributable to international climate change accords. The Guidance advises registrants who are reasonably likely to be affected by international climate agreements to consider the possible impacts when evaluating their disclosure obligations.

(C) Indirect Consequences of Regulations or Business Trends

The Guidance identifies potential indirect consequences of climate change legislation that may create risks or opportunities for registrants, including:

• 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 renewable energy sources; and
• Decreased demand for services related to carbon-based energy sources, such as drilling services or equipment maintenance services.

The Guidance also notes that registrants may be required to disclose reputational risks if public perception regarding greenhouse gas emissions could expose them to adverse business or financial consequences.

 (D) Physical Impacts of Climate Change

Finally, registrants may also be required to disclose significant physical effects attributable to climate change to the extent that they materially impact the registrant’s business or financial condition. The Guidance notes that significant physical effects include severity of weather (e.g. floods or hurricanes), rising sea level, arability of farmland, and water supply and quality. The possible material consequences of these effects include:

• Property damage and disruptions associated with rising sea levels;
• Indirect financial and operational disruptions attributable to floods and hurricanes;
• Increased insurance claims and liabilities;
• Decreased agricultural capacity attributable to drought or other weather-related changes; and
• Increased insurance premiums or deductibles, or decreased availability of coverage.

For more information regarding SEC disclosure requirements and climate change generally, please contact Dustin Till, or any member of Marten Law’s Climate Change practice group.