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Still Not Sure that Climate Change Affects Your Business? SEC Adopts Climate Change Disclosure Guidance

This article was published in the March 2010 edition of the Chester County Bar Association's monthly newsletter "New Matter."

Most of us are familiar with the annual disclosure requirements for companies as represented by the Form 10-K. The federal securities laws require publicly traded companies to disclose information on a periodic basis for the benefit of investors. For example, many domestic companies must submit annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K for a number of specified events.

The Form 10-K annual report provides a comprehensive statement of a company's business and financial condition, and includes audited financial statements. Existing Form 10-K requirements already mandate certain disclosures related to environmental matters.

For instance, the existing disclosure requirements specify that a company disclose as to the material effects that the compliance with law or regulations may have on the capital expenditures, earnings and competitive position of the company. Further, companies must disclose as to administrative or judicial proceedings regulating the discharge of materials into the environment. The SEC has taken the position that existing disclosure requirements may mandate disclosure as to the anticipated impact of future environmental regulation. Disclosures usually must be made concerning material effects, which are defined as those known trends or uncertainties that a company believes are likely to result in material changes to a company’s liquidity, net sales, or income from operations.

For a number of years, some large institutional investors (e.g., CalPERS, and the National Association of Insurance Commissioners (“NAIC”)) and environmental groups (e.g., the Environmental Defense Fund) have filed petitions with the SEC seeking requirements addressing climate change disclosures.

On January 28, 2010, the SEC Commissioners voted, 3 to 2, in favor of adopting interpretive guidance for companies on disclosures relating to the effects of climate change. The guidance is not yet available, but the SEC issued a press release announcing the vote and describing the nature of the guidance.

In the press release, the SEC set forth the following areas where the effects of climate change may trigger disclosures:

  • Impact of Climate Change legislation and regulation (both existing and pending). For instance, a company may have an obligation to make disclosures on anticipated material effects of the pending carbon emission cap and trade bill pending before the U.S. Senate. The carbon emission cap and trade bill has been identified as a major legislative objective of the Obama Administration in 2010.

  • Impact of International Accords and Treaties.

  • Indirect Consequences of Regulation or Business Trends. The SEC states that legal, technological, political and scientific developments related to climate change may create new opportunities or risks for companies. For instance, “green” companies might experience increased demand for goods or services, and “smokestack” industries may experience downturns. Accordingly, a company must evaluate the actual or potential indirect consequences it may face due to climate change regulatory or business trends.

  • Physical Impacts of Climate Change. The SEC states that companies should disclose the actual and potential material impacts of environmental matters on their businesses. For instance, a company that provides maritime products or services should evaluate the impacts of more severe storms or rising sea levels on the business.

    The adoption of the new interpretive guidance, which many commentators consider to be “binding” on companies, was met with immediate criticism. For instance, Representative Joe Barton (R-Texas), the top Republican on the House Energy and Commerce Committee, criticized the proposal for being “transparently political and such a breathtaking waste of the commission’s resources.” The Wall Street Journal, in an editorial dated January 29, 2010, and titled the “Insecurity and Change Commission,” stated: “Never mind Madoff, SEC gumshoes are on the climate beat.”

    The “consensus view” that climate change is occurring is not unanimous, and the SEC apparently has not chosen sides. In the SEC’s press release on the new interpretative guidance, Chairman Mary Shapiro took pains to note that the SEC was not expressing any opinion on climate change: “We are not opining on whether the world’s climate is changing, at what pace it might be changing, or due to what causes. Nothing that the Commission does today should be construed as weighing in on those topics.”

    Regardless of the skirmishing, we think this is another indication that legal and regulatory changes relating to climate change are coming fast upon us. For example, EPA recently issued regulations addressing the reporting of green house gas emissions, and the NAIC approved a mandatory requirement for certain insurers to disclose climate risks to regulators. We think businesses would be well advised to seek out information and guidance about the regulatory impacts of climate change and act accordingly.

    For more information, please contact John R. Embick at 215.640.8530 or jembick@thorpreed.com.

    This Thorp Reed & Armstrong, LLP article is prepared in summary form and is not to be construed as legal advice or opinion on any specific fact or circumstance. We do not assume any responsibility to revise the Communiqué if there are subsequent changes in the law.

    February 2010


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