Public companies now need to pay closer attention to evaluating climate change in order to determine their disclosure obligations. On February 2, 2010, the U.S. Securities and Exchange Commission published an Interpretive Release concerning climate change disclosure (the “SEC Guidance”). The SEC Guidance responds to heightened public awareness of climate change as well as calls from certain sectors of the investment community for specific guidance. Although the SEC Guidance does not create new legal requirements, it will likely lead to enhanced disclosure.
Highlights of the SEC Guidance
The SEC guidance highlights four ways in which climate change may trigger disclosure obligations:
- Impact of international climate change accords; Indirect consequences of climate change regulation or resulting business trends, such as (a) decreased demand for carbon-intensive goods and services related to carbon-based energy sources and a corresponding increased demand for goods and services with a low carbon footprint, (b) increased competition to develop innovative products, and (c) increased demand for alternative energy sources;
- Physical impacts of climate change, such as (a) property damage and disruption to operations on coastlines as a result of rising sea levels or severe weather, (b) indirect financial and operational impacts from disruptions to operations of major customers or suppliers from severe weather, (c) decreased agricultural production in areas affected by weather-related changes, and (d) increased insurance claims, premiums and deductibles for public companies with facilities in areas subject to severe weather.
If material to a registrant’s business, disclosure of the foregoing potential impacts of climate change may be required under Regulation S-K, specifically Item 101 (description of business), Item 103 (legal proceedings), Item 303 (management discussion and analysis) or Item 503(c) (risk factors).
Implications of the SEC Guidance
Public companies should keep the following issues in mind in preparing their annual reports to shareholders, Form 10-Ks and other public filings.
- Consider both the risks and opportunities of climate change: Companies should not focus solely upon the risks of climate change, but also on the opportunities of climate change (such as sales of allowances in a cap and trade system or increased demand for products with a low carbon footprint).
- Consider both indirect and direct risks and opportunities of climate change: The SEC Guidance provides examples of direct climate change risks (such as potential physical impacts or costs to improve facilities) as well as indirect risks and opportunities (such as changing demand for certain goods and services or reputational harm).
- Resolve doubts concerning the materiality of climate change in favor of disclosure: Although the SEC Guidance does not alter the traditional standard of “materiality” — which requires disclosure if a reasonable investor would view the information as important in making an investment decision — doubts whether information is material should be resolved in favor of disclosure.
- Ensure that adequate disclosure controls and procedures are in place to evaluate the materiality of climate change issues: The SEC Guidance does not require public companies to disclose their carbon footprint, but management needs sufficient information concerning greenhouse gas emissions and related operational matters to evaluate the likelihood of a material effect. Therefore, companies must have adequate controls and procedures to process information potentially subject to disclosure. Such controls and procedures should already be in place for management to make required certifications under Sarbanes-Oxley, but disclosure committees should now add an assessment of the materiality of climate change issues to the company’s business.
- Reconcile voluntary and mandatory disclosure of climate change issues: Many public companies voluntarily disclose information regarding their greenhouse gas emissions and climate change risk in corporate sustainability reports and various greenhouse gas reporting programs, such as the Climate Registry, the Carbon Disclosure Project and the Global Reporting Initiative. Companies should ensure that any mandatory SEC disclosure is consistent with prior voluntary disclosure or be prepared to explain any differences.
Richard M. Schwartz is a litigation partner and head of the environmental practice group in the New York office of Fried, Frank, Harris, Shriver & Jacobson LLP. Donna Mussio is a senior associate in the environmental practice group. Coleman Kennedy, an associate in the environmental practice group, also contributed to the preparation of this article.