As annual reporting season approaches, public companies may want to consider climate change issues when determining material information to be disclosed under SEC Regulation S-K. Increases in climate change regulation, certain environmental issues affecting the registrant's industry or assets, and the adoption of corporate “green” initiatives to address climate change may impact the registrant's financial condition or competitive position.
As more investors become interested in companies' environmental, social and corporate governance practices, public companies may voluntarily elect to include information related to climate change in their SEC filings. Companies should consider disclosing the physical, regulatory and financial consequences that climate change may have on their business.
Disclosure of climate change issues will be most arduous for companies with significant greenhouse gas emissions, such as airlines; trucking or other companies with fleets of vehicles; manufacturing companies; oil and gas companies and other businesses that rely on coal or oil as their primary fuel sources; and those directly tied to the weather, such as ski resorts, and agricultural, timber and insurance companies.
Current disclosure framework
Although SEC regulations do not specifically require disclosures about climate change issues, public companies must disclose all material information necessary for potential investors to make informed investment decisions. As climate change issues relate to those disclosures, such information may fall under several items, including:
- Item 101 – requiring disclosure of material effects of government regulation (including Item 101(c)(xii), which requires disclosures about the impact of regulations governing environmental discharges, along with the potential effect of compliance on earnings, capital expenditures and competitiveness in the industry)
- Item 103 – requiring disclosure of material pending legal proceedings to which the registrant is a party or where its property is the subject
- Item 303 – requiring disclosure of currently known trends and uncertainties that will result in, or are reasonably likely to result in, a material increase or decrease in the registrant's financial condition or results of operation
- Item 503(c) – requiring discussion of risk factors
Call for SEC guidance
In 2008, a coalition of environmental groups, state officials, investment advisers and institutional investors petitioned the SEC for “an interpretive release clarifying that material climate-related information must be included in corporate disclosures under existing law.”1 The coalition asked the SEC to require public companies to disclose the financial risks related to climate change that may materially impact their operations. The coalition also urged the SEC to begin examining the adequacy of registrants' financial disclosures regarding climate change. In addition, the call for disclosures by companies in SEC filings related to the impacts of climate change has caught Congressional attention, appearing in the Lieberman-Warner Climate Security Act of 2008. The SEC has not yet acted on the petition or otherwise provided guidance on how companies should disclose climate change issues.
Climate change issues
Although the SEC has not yet issued guidance nor penalized any companies for inadequate disclosures regarding climate change, registrants should integrate climate change considerations to the mix of factors it considers for their annual report on Form 10-K and other securities filings. Disclosures related to climate change and its impact on public companies may include the following types of issues:
- Risks to the business of the registrant. Risks may include damage to collateral held by banks or company investments due to warming temperatures or rising water levels or the need to curtail or retool products due to increased regulation of greenhouse gases (for example, automobiles that may emit greenhouse gases at higher rates) or increased transportation and energy costs.
- Increased costs for environmental compliance. Growing recognition of climate change impacts has ushered in a call for more environmental regulation, notably stricter emissions standards and reporting obligations for greenhouse gases. Companies may face significant costs to make modifications to utilize cleaner energy sources (for example, replacing diesel with emergency generators powered by more environmentally benign fuels) and/or to comply with changing regulations. New cap-and-trade legislation, geared to capping and reducing greenhouse gas emissions at a state, regional or national level, may require registrants to purchase emission credits or permits or restrict operations to meet new, lower emissions standards. Registrants may face increased compliance costs both domestically and at any international operations as more nations enact climate change regulations.
- Market risk. Companies may see a decline in the market for their products and services if they are perceived to be environmentally unfriendly (for example, transportation companies that have failed to voluntarily upgrade fleets to more efficient vehicles or manufacturing companies that have not voluntarily reduced emissions or installed newer equipment).
- Risk of litigation. Citizens' groups may bring public nuisance lawsuits against registrants for emissions of greenhouse gases. Thus far, public nuisance lawsuits against the electric industry and the automobile manufacturing industry have been unsuccessful, but the frequency of these lawsuits and the number of industries subjected to them are anticipated to rise. In addition, federal, state and local agencies may initiate increased numbers of enforcement actions as more regulations related to climate change are enacted. These issues may be particularly acute for registrants with a significant presence in geographic regions such as the Northeast or West Coast, where both citizens' groups and government regulators are more active than in other parts of the nation.
While some companies may face some of the risks outlined above, others may find great business opportunities with the growing recognition of climate change issues. Industries on the forefront of green technologies, such as wind power, geothermal, solar and biomass producers, and other alternative energy sources, may benefit greatly from increased regulation. In addition, the increasing premium on “green” companies in the marketplace may create opportunities for companies that seek ways to implement environmentally friendly practices.
Increased numbers of shareholders are looking at a company's environmental practices and its commitment to environmental responsibility when making investment decisions. Some companies currently make information related to climate change available to investors in voluntary corporate reports and other materials on corporate green initiatives. A growing number of companies are including the information in their SEC filings, including companies in the automobile, oil and gas, insurance, petrochemicals and utilities industries.2 Even if disclosures regarding climate change issues are not expressly required by the SEC regulations, companies may want to consider including such information in their communications to shareholders to recognize investors' interest in these issues and to share their company policies on climate change.
1 Request for Interpretive Guidance on Climate Risk Disclosure, SEC File No. 4-547 (Sept. 18, 2007).
2 Fifth Survey of Climate Change Disclosure in SEC Filings of Automobile, Insurance, Oil & Gas, Petrochemical and Utilities Companies, Friends of the Earth (October 2006).