Compliance Week piece [registration required]
on Feb. 9, Jaclyn Jaeger explains the four areas the guidance directs companies to consider the implications of climate change:
- “How regulation and legislation pertaining to climate change or environmental protection, including potential positive impacts on the company, might affect business operations.
- “The possible effects of international treaties, specifically those associated with governing greenhouse gas emissions.
- “Indirect consequences of regulation, such as reduced demand for greenhouse-gas producing products, or higher demand for products with lower emissions than competitor products.
- “The physical impacts of climate change.”
One of the overall points to Jaeger’s article was that while “in theory the guidance is merely a fresh set of advice on how companies can improve disclosures they are already making.” However, she points out the reality is not many companies have addressed climate change risks in their annual reports.
Here are five must-read publications on the topic, including the SEC’s guidance itself:
- Commission Guidance Regarding Disclosure Related to Climate Change, SEC Staff, Feb. 2. www.sec.gov/rules/interp/2010/33-9106.pdf. Summary: The interpretive release is intended to remind companies of their obligations under existing federal securities laws and regulations to consider climate change and its consequences as they prepare disclosure documents to be filed with the SEC and provided to investors. The SEC will monitor the impact of this interpretive release on company filings as part of our ongoing disclosure review program. In addition, the Commission’s Investor Advisory Committee is considering climate change disclosure issues as part of its overall mandate to provide advice and recommendations to the Commission, and the Commission is planning to hold a public roundtable on disclosure regarding climate change matters in the spring of 2010. It will take into account what is said as it determines if further guidance is necessary.
- Defining Issues: SEC Issues Interpretive Release for Climate-Change Disclosures, Melanie F. Dolan and Marlin A. Brown, KPMG’s Department of Professional Practice, Feb. 8, www.us.kpmg.com/microsite/DefiningIssues/2010/di-10-8-sec-interpretive-climate-change-disclosures.pdf. Key findings: Regulatory, legal, and business developments related to climate change and climate-related risks that may have an impact on the financial condition or operating performance of registrants must be disclosed in regulatory reports filed with the SEC. In the United States, legislation has been proposed that would limit greenhouse gas emissions, while the Environmental Protection Agency has taken steps to regulate greenhouse gases. Internationally, governments have adopted directives such as the Kyoto Protocol. Industries also have begun to react. Beginning May 1, 2010, insurance companies will be required to disclose the financial risks posed by climate change and the actions taken to mitigate those risks. Those developments prompted the SEC to issue its interpretive release. Registrants’ disclosures should focus only on material information and exclude immaterial information that does not promote understanding of their financial condition, liquidity and capital resources, changes in financial condition, and results of operations.
- 2010 Investor Statement on Catalyzing Investment in a Low-Carbon Economy, Institutional Investors Group on Climate Change, Jan. 12, www.iigcc.org/docs/PDF/Public/2010InvestorStatement.pdf. Key findings: While this statement came out a month before the SEC guidance, it does address disclosure not only in the United States, but worldwide. It states that “reflecting our town responsibilities and fiduciary duties, we encourage all institutional investors, including asset managers and asset owners, to ensure they are incorporating climate risks and opportunities into due diligence, governance systems, and portfolio valuations. However, although many of us have spent years engaging with companies to encourage full climate risk disclosure, voluntary disclosure is unlikely to achieve the penetration needed for efficient financial markets to make the best use of such disclosure…” The statement goes on to call for the SEC and other worldwide regulators to require companies to disclose to their investors material climate-related risks and the programs in place to manage those risks.
- SEC Speaks on Climate Change Disclosure Obligations, Client Newsflash, DavisPolk, Jan. 27, http://www.davispolk.com/files/Publication/8a221a8a-2142-47fe-9e1c-9d17dc2ae0de/Presentation/PublicationAttachment/c7160f31-73cd-43de-95b1-a31ba3154bb5/012710_env.html. Key Findings: The SEC has made it clear that all companies need to review and analyze their public disclosure now to ensure full compliance with existing SEC rules and regulations in light of climate change risks. The release does not change or add to any existing SEC disclosure obligations, which already mandate disclosure of any risks that are material to a company. The SEC went to great lengths to point out that it is not taking a stance on the existence, cause or severity of climate change itself. Instead, the release will highlight and provide examples of climate change developments that might result in the need for disclosure. The indirect risk to a company’s business operations or financial condition resulting from reputational damage arising out of the public’s perception of its greenhouse gas emissions should be carefully analyzed and potentially specifically discussed. Disclosure will be monitored and additional steps may be taken by the SEC in the future.
- United States: Does Climate Change Affect Your Business? SEC Issues Interpretive Guidance On Disclosure For Public Companies, Ellen Sheedy, William G. Malley, Allan R. Abravanel, Stephen J. Higgs, Tom Lindley (PerkinsCoie), Mondaq, Feb. 9, www.mondaq.com/unitedstates/article.asp?articleid=93742. Key Findings: The SEC's interpretive release provides guidance to companies on how they should evaluate their existing disclosure requirements as they apply to climate change matters. It does not implement any new requirements. Instead, the release focuses on disclosure obligations arising from changing regulatory, legislative and other business developments related to climate change, as well as physical changes such as weather and availability of resources, any of which could have a direct or indirect effect on a company’s finances and operations. The disclosure requirements most likely to be relevant relate to the description of business, legal proceedings, management's discussion and analysis and risk factors. Foreign private issuers may also need to provide disclosure under similar disclosure requirements.
The SEC has put all public companies on notice that as of Feb. 8 it will look hard at 10-Ks, 8-Ks and all regulatory filings it oversees for disclosures related to climate change financial risks. The impetus for the regulator’s interpretative guidance issued on Feb. 2 was the push by myriad investor groups and Copenhagen Accord reached late last year.
With many companies feverishly working on their year-end financial statements for 2009, not only will they have to worry about meeting the new SEC proxy disclosures but they must also take into account these climate change disclosures. Now, mind you, technically companies were supposed to already be considering the material effect climate change risk could have on their financial condition under existing disclosure law. That’s why the SEC issued an interpretative guidance instead of new rules.
So what does it mean for U.S. public companies this proxy season? Basically, it means that all those disclosures that were supposed to be made under Regulation S-K will be in full effect. Companies will have to take seriously the politically charged climate change issue, no matter what side they take.
The SEC will allow for input from public companies at a spring roundtable on disclosure of climate change risks.
In a thorough