As the debate over climate change continues, the Securities and Exchange Commission (SEC) has revisited some fundamental disclosure requirements with an eye toward climate change and has issued interpretive guidance to assist companies in identifying and evaluating the types of issues and risks companies should (and in some cases, must) disclose to investors. The SEC identified four categories of business and legal topics relating to climate change that management should consider in determining what disclosures may be necessary.
The Impact of Legislation and Regulation
Capital Expenditures for Compliance. Item 101 (description of business) requires disclosure of any material estimated capital expenditures for environmental control facilities for the remainder of a registrant’s current fiscal year and its succeeding fiscal year and for such further periods as the registrant deems material.
Existing or Pending Legislation. Item 503(c) (risk factors) may require disclosure regarding existing or pending legislation or regulation, and issuers should focus on risks specific to their business or industry and avoid generic disclosures (i.e. disclosures that could apply to any company). Disclosure will also be required under Item 303 (MD&A) if the legislation is reasonably likely to have a material effect on the issuer (and, for pending legislation, whether it is reasonably likely to be enacted).
Disclose Both Positive and Negative Consequences. Issuers must disclose the consequences of climate change legislation or regulation, and the consequences could be positive or negative, for example:
- Costs to purchase, or profits from sales of, allowances or credits under a “cap and trade” system; and
- Profit or loss, arising from increased or decreased demand for goods and services produced by the registrant (whether arising directly from legislation/regulation or indirectly from changes in costs of goods sold).
Indirect Consequences of Regulation or Business Trends
Demand and Competition. The SEC observed that legal, technological and political developments regarding climate change may create new opportunities or risks for issuers by increasing or decreasing demand and competition. Examples of possible changes in demand and competition were:
- Decreased demand for goods that produce significant greenhouse gas emissions and services related to carbon based energy sources, such as drilling services or equipment maintenance services;
- Increased demand for alternative energy sources and goods that result in lower emissions than competing products; and
- Increased competition to develop innovative new products.
Strategic Decisions. Any issuer that plans to reposition itself to take advantage of potential opportunities, such as through material acquisitions of plants or equipment, may be required by Item 101(a)(1) (i.e. MD&A) to disclose that plan.
Reputation. Issuers in industries sensitive to public opinion should consider whether the public’s perception of any publicly available data relating to their greenhouse gas emissions could harm their reputation and, consequently, their operations or financial condition.
The Physical Impact of Climate Change (severe weather and changes to the environment)
Issuer should consider the possible effects that severe weather and other environmental changes (such as changes in sea levels, the arability of farmland, and water availability and quality) could have on their operations and results, such as (1) interruptions in manufacturing or transportation, (2) increased insurance claims, liabilities and premiums, (3) the availability of insurance coverage, or (4) decreased agricultural production capacity in areas affected by drought or other weather-related changes. Issuers must consider these issues with respect to customers, suppliers and other business partners as well as themselves.
International Accords
Registrants should consider the actual or potential impact of treaties or international accords relating to climate change on their business. The analysis of whether or when disclosure should be made is the same as for existing and pending legislation (see above).
Note on Financial Accounting Statements
Lastly, the SEC directs issuers to consider Financial Accounting Standards Board (FASB) Accounting Standards Codification Topic 450, Contingencies, and FASB Accounting Standards Codification Topic 275, Risks and Uncertainties, in addition to any other financial accounting standards an issuer believes may warrant consideration in its industry or for its particular operations.
Conclusion
The SEC has emphasized that the interpretive guidance does not impose any additional disclosure requirements on issuers. It is intended to assist issuers in evaluating how to comply with the existing disclosure requirements of the federal securities laws and regulations. Additionally, SEC Chairman Mary Schapiro has stated that the guidance should not be construed as the SEC taking a position on whether climate change is occurring. It is merely an attempt to ensure that current disclosure rules are consistently applied.
If you have questions regarding the interpretive guidance and how it may affect future SEC filings by your company, please contact us. The full text of the guidance is available at http://www.sec.gov/rules/interp/2010/33-9106.pdf.