On January 27, 2010, in response to petitions filed by institutional investors and other investor groups, the Securities and Exchange Commission (“SEC”) published an interpretive release to provide greater guidance to public companies regarding the Commission’s existing disclosure requirements as they apply to climate change matters (the “Guidance”).
The SEC’s action follows settlements entered into by the New York State Attorney General’s office with three major power companies mandating more extensive disclosure of climate change risks, and the EPA’s recently-finalized rule mandating a wide array of companies to publicly report their greenhouse gas emissions.
During comments announcing the decision, SEC Chair Mary Schapiro emphasized that the Guidance is not meant create new law, and instead is aimed at providing consistency among corporate climate change disclosures, which have been marked by significant variability in scope and content, even among companies within the same industry.
The Guidance was approved by a 3-2 vote of SEC Commissioners, divided along party lines. Dissenting Commissioners objected to the SEC using its interpretive power to address areas that are not within its competence and expertise. The Guidance also has been heavily criticized by certain Republican members of Congress.
Although the Guidance does not technically create new legal obligations, it does, in practice, advance principles that public companies must carefully consider when updating and revising their environmental disclosures. Although some critics have questioned whether the Guidance will really solve the problem of variability in climate change disclosure due to potentially different interpretations of the materiality standard, it will, at the very least, promote more careful attention to corporate disclosure of climate change issues and very likely drive companies toward more fulsome disclosure.
Many of the key principles articulated in the Guidance reiterate fundamental tenets of good corporate disclosure that the SEC has been applying for years, but when applied specifically to climate change matters, they create a formidable set of challenges for companies making disclosure decisions. For example:
- In determining whether a climate change risk is material, the company should ask whether there is a substantial likelihood that a reasonable investor would consider the information important, and resolve doubts in favor of disclosure;
- Disclosure of a known trend or uncertainty regarding climate change (such as future legislation or regulation) is required unless management determines that it is not reasonably likely to occur or is not material;
- The time horizon of an analysis underlying a disclosure may be relevant to a registrant’s assessment of whether a future trend or uncertainty is reasonably likely to occur or is material; and
- Companies should address, when material, their difficulties in assessing the effect of the amount and timing of uncertain events and provide an indication of the time periods in which resolution of the uncertainties is anticipated.
In light of these uncertainties, companies would be well advised to consider certain core issues as they relate to disclosure of the risks and effects of climate change, including the following potential concerns as they may be relevant and material to a particular company’s business:
- Companies should assess whether they have sufficient disclosure controls and procedures in place to process information pertaining to climate change disclosure;
- Because climate change is a rapidly developing area, companies should regularly assess their potential disclosure obligations in light of new developments;
- Climate change disclosure should consider the material impacts of current and reasonably anticipated future international accords, as well as federal, state, and local laws and regulations;
- Companies should consider the extent to which their plants and operations are subject to current and reasonably anticipated material physical impacts associated with climate change; and
- Companies should consider whether the indirect consequences of climate change regulation will create new material risks or opportunities that could impact their profitability.
It remains to be seen how these principles will be applied, but, taken together, they point toward increased analysis and disclosure of climate change risk by public companies.
