SEC Adopts Guidance For Disclosing Climate Change-Related Risks
Public companies may need to modify their environmental risk reporting, thanks to a Securities Exchange Commission decision on Wednesday, Jan. 27, 2010. (View press release.) The SEC voted to require corporations to disclose the effects of global warming and potential climate change legislation when disclosing business risks to investors. The Commission said companies in the U.S. should consider, for example, international accords, indirect effects such as lower demand for goods that produce greenhouse gases, and physical impacts such as the potential for increased insurance claims in coastal regions as a result of rising sea levels.
Prior SEC requirements had been unclear as to what, if any, climate change-related risks must be disclosed in SEC filings such as the annual report on Form 10-K. Consequently, many companies do not mention climate change in their filings. Nevertheless, growing numbers of investors have argued that climate-related risks and opportunities constitute a “material” impact, but an absence of clear SEC guidance on climate-related issues has allowed many firms to exclude climate-related effects from annual reports. Now the SEC has approved new guidance that outlines how climate change could trigger disclosure requirements for firms.
The SEC’s guidance does not have the force of federal securities law or SEC regulation. However, it provides insight to public companies on how to interpret the Commission’s disclosure rules. Moreover, the new guidance underscores the materiality of climate change risk to complying with the Commission’s reporting requirements.
Although SEC regulations do not explicitly address climate change-related disclosure, existing rules do require disclosure of all material risks faced by a reporting company. In addition, registrants are required to disclose the material effects of environmental compliance “on capital expenditures, earnings and competitive position of the registrant and its subsidiaries;” material pending legal proceedings; and known trends or uncertainties that the registrant “expects will have a material favorable or unfavorable impact on net sales or revenues or income from continuing operations.” Registrants also have a duty under the Securities Exchange Act not to make material misstatements or omissions in their SEC filings.
The SEC guidance identifies three material forms of environmental risk stemming from climate change that companies should disclose, including:
- Regulatory/litigation risk (e.g., changing legal requirements that could result in increased permitting and compliance costs, changes in business operations, the discontinuance of certain operations, and related litigation); and
- Market risk (e.g., declining market for products and services seen as greenhouse gas intensive); and
- Physical risk (e.g., risks to property posed by rising sea levels, increased frequency or severity of storms, drought, and other physical occurrences attributable to climate change).
The SEC guidance proposes that companies not only consider current legal requirements, but also evaluate the potential impact of pending legislation and regulation related to this topic. The guidance also specifically references the importance of disclosing, when material, the risks or effects of international accords and treaties relating to climate change on business.
Indeed, with new and proposed federal and state regulations regarding climate change, companies may have more pressing reasons to boost their disclosures than a clarification from the SEC. Among them are regulations from the Environmental Protection Agency requiring companies to report their greenhouse gas emissions starting this year.
The SEC guidance recommends that a company disclose “the actual or potential indirect consequences it may face due to climate change related regulatory or business trends.” For example, companies may assess decreased demand for goods that result in significant greenhouse gas emissions. Or, companies may disclose increased demand for goods that produce lower emissions than competing products. This guidance seems to recognize the “greening” of the American marketplace and the resulting value placed on “green” goods and services.
When deciding what to disclose, a company should consider the actual and potential physical impact on its business of climate change. For instance, an insurance company may consider whether there is a risk of increased insurance claims in coastal regions as a result of severe weather or changes in sea levels.
The SEC guidance comes on the wake of actions by various states, including those of Attorney General Cuomo of New York, who had been insisting on disclosures by companies doing business in New York. See, e.g., http://www.ag.ny.gov/media_center/2009/nov/nov19a_09.html.
Davis Wright Tremaine regularly assists both large and small public companies in connection with disclosure and compliance matters under the federal securities laws, and is actively engaged in monitoring developments in these areas. Our climate change practice group is comprised of seasoned practitioners from our environmental, energy, corporate and securities, litigation, and government relations groups. We are available to assist with climate change disclosure matters for our public clients, and to update them on proposed federal and state regulations regarding climate change.