A little over a year ago, many companies preparing their 10-K filings scrambled to comply with the Securities and Exchange Commission’s newly released guidance concerning the disclosure of climate change-related risks. The SEC’s February 2010 interpretive guidance instructed companies to consider whether to disclose certain climate-related risks in their securities filings. One year later, there is some evidence that registrants are increasingly disclosing climate-related risks, though climate change-related disclosure is not as widespread or as extensive as some would like. In addition, to date the SEC has not taken a particularly proactive role in following up on its guidance.
The SEC released interpretive guidance on the application of existing SEC disclosure requirements to climate change-related matters on February 2, 2010. While the guidance did not create a new rule, regulation or legal requirement, or change the materiality standards under existing SEC rules, it was intended to provide clarity for public companies and their investors and encourage consistent application of existing rules.
At the time the SEC highlighted four areas for companies to consider when assessing whether climate-related disclosure is required under its rules and regulations:
- the impact of legislation and regulations, such as laws requiring companies to install pollution control equipment,
- the impact of international climate change accords, such as the Kyoto Protocol,
- indirect consequences of regulation, such as decreased demand for carbon-intensive products and
- physical risks of floods, hurricanes and other natural disasters that may result from climate change.
A little more than one year after the SEC issued its guidance, there is some evidence of increased disclosure of climate-related risks. An October 2010 report by ISS Corporate Services, “Disclosing Climate Risks: How 100 Companies Are Responding to the New SEC Guidelines,” analyzed climate disclosure in the 10K filings of the 100 largest U.S. public companies (by market capitalization). Among its conclusions, ISS found that:
- A little over one-half of the companies mentioned climate change in their filings;
- Approximately one-quarter of the companies addressed physical risks to their assets posed by climate change;
- Very few companies addressed all of the issues outlined in the SEC’s climate guidance; and
- The energy and utilities sectors had the most comprehensive climate-related disclosure.
In addition, a February 2011 report from CERES, a coalition of investor and environmental groups, noted that there was some improvement in companies’ climate change disclosure. However, CERES also identified what it considered to be inadequate disclosure by various companies and outlined specific steps for companies to take to improve their climate disclosure.
When it released the guidance, the SEC said it would hold a public climate change disclosure roundtable in the spring of 2010. However, the roundtable did not take place and the commission has not been particularly proactive in following up on its interpretive guidance. In addition, the SEC said it would monitor disclosure both through its Investor Advisory Committee (IAC) (which was considering climate disclosure issues as part of its mandate to provide the SEC with input on investor concerns) and through its ongoing disclosure review program. The IAC has since been disbanded.
While the SEC has been monitoring climate disclosure, its enforcement of any perceived violations has been limited. Based on a review of publicly available information, there are fewer than a dozen comment letters in which the SEC sought additional information concerning climate disclosure in registrants’ 2010 filings. In some of the comment letters, the SEC asked registrants to explain what consideration they had given to the climate guidance. Some registrants acknowledged the existence of the guidance, but explained that climate disclosure was not warranted as climate risks were not material to the business. In other instances, the SEC asked registrants to expand their disclosure concerning the impact of climate change legislation or the effects of possible increases in global temperatures or to discuss the costs incurred in reducing greenhouse gas (GHG) emissions. Some registrants revised their disclosure to more directly address climate-related issues.
The SEC’s fairly muted follow-up to the interpretive guidance may be linked to several factors. The political climate has changed since the SEC issued its release; it now appears unlikely that Congress will pass a comprehensive climate change law in the near future. Additionally, the SEC may have limited capacity to address climate change disclosure given budget and staffing constraints and the deluge of Congressional demands arising out of the Dodd-Frank Wall Street Reform and Consumer Protection Act. As a result, the SEC may simply be focusing on what it considers to be more pressing issues than climate change disclosure.
The task of analyzing climate risks is more difficult given the uncertainty regarding climate change legislation and regulation. A year ago, the passage of a comprehensive climate change bill appeared more likely given that the U.S. House of Representatives had passed such a bill and leading lawmakers in the U.S. Senate were discussing similar legislation. However, in 2010, efforts to pass a comprehensive climate change bill stalled in the U.S. Senate. Thus, registrants that previously disclosed the likelihood of passage of a climate change bill should update their disclosure to account for developments in the U.S. Congress.
While climate change legislation has stalled, the United States Environmental Protection Agency (EPA) has started regulating certain GHG emissions. For example, the EPA requires certain large GHG emitters to annually report their emissions to the EPA. The EPA is also seeking to curb GHG emissions under the Clean Air Act. However, some members of Congress are seeking to scale back, if not eliminate, the EPA’s GHG regulations. It remains to be seen whether the EPA will roll back its GHG rules or initiate additional GHG rules. Registrants impacted by the EPA’s regulations should consider these uncertainties when drafting their climate change disclosure.
In addition, companies that are disclosing climate change information in other forums, such as in company sustainability reports or through organizations such as the Carbon Disclosure Project (a not-for-profit organization that maintains a database of climate change information), should ensure that such disclosures do not conflict with any climate-related information contained in their securities filings.
It is unclear whether the SEC will increase its focus on climate change disclosure in coming months. Registrants, particularly large GHG emitters, will need to continue monitoring developments concerning legislation, regulation, physical effects and other trends related to climate change. As developments in these areas change rapidly, registrants should update their disclosure to assure that it remains accurate.
Stuart Hammer is counsel and Lauren M. Boccardi is an associate in the New York office of Debevoise & Plimpton LLP. They are members of the firm’s Environmental Practice Group.