News & Knowledge
SEC Publishes Interpretive Guidance on Disclosure Requirements Relating to Climate Change
W. Brinkley Dickerson, Jr.
Eric A. Koontz
By a vote of 3 to 2, the SEC recently issued “Commission Guidance Regarding Disclosure Related to Climate Change.” The Release will be effective immediately upon its publication in the Federal Register. The essence of the Release is that the SEC believes that companies need to be saying more regarding climate change and the potential impacts on their businesses. This guidance applies not only to energy and other industrial companies where climate change is most often considered, but also to any company that can be impacted by, among other things, changes in weather patterns or higher energy costs. While the SEC states that the Release is intended to remind companies of their existing obligations, we believe it raises several notable issues.
Scientific Uncertainty May Lead to Speculative Disclosures: First, although the Release avoids addressing the scientific uncertainty as to the existence or cause of climate change and the political uncertainty of regulatory responses, it does note that companies should, when material, discuss "the difficulties involved 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.” Companies making these disclosures in their MD&As are likely to have to speculate, however, on the likelihood of passage of various versions of state and federal legislation and regulations in order to evaluate the impact on their businesses under the guidance in the Release.
Multiple Disclosure Regimes Have Different Disclosure Thresholds: Second, the Release notes that, while many SEC filings contain some climate change and emissions-related information, more information is publicly available outside of SEC filings, including information arising from state disclosure requirements, EPA disclosure requirements, the Climate Registry, the Carbon Disclosure Project and the Global Reporting Initiative. The SEC cautions that “registrants should be aware that some of the information they may be reporting pursuant to these mechanisms also may be required to be disclosed in filings made with the [SEC] pursuant to existing disclosure requirements.” The Release does not point out, however, that these mechanisms generally do not have the materiality threshold or purpose that SEC required disclosures have, which obviously affects the type, volume and detail of disclosure under the multiple regimes.
Corporate Governance Mandate: Third, the Release implicitly may heighten corporate governance requirements, as it states several times that while materiality determinations may limit what actually is disclosed, such disclosure determinations should not limit the information that management considers in making its determinations, and that companies “are expected to consider all relevant information even if that information is not required to be disclosed.” The Release links this requirement to management’s assessment of whether sufficient “disclosure controls and procedures” exist, implying that management cannot make this assessment without a broader base of information than what ultimately is disclosed. Strictly construed, the Release may require management of companies promptly to undertake a comprehensive review of several factors in order to evaluate all information “relevant” to the scientific basis for and against the existence of climate change and the possible direct and indirect effects of climate change.
Speculating on the Future: Fourth, the Release sets forth four topics that are examples of climate change-related issues that a company may need to (and “should” is used in several cases) consider: (1) impact of legislation and regulation, (2) international accords, (3) indirect consequences of regulation or business trends and (4) physical impacts of climate change. This fourth topic implicitly links climate change with certain physical events, such as the severity of weather (such as floods or hurricanes), sea levels, arability of farmland, and water availability and quality in a manner that could cause the investing public to confuse a company’s disclosure of a physical event with consensus or agreement regarding the underlying cause. Companies making disclosures in their MD&As also may need to speculate on the likelihood that specific weather trends will or will not continue in order to evaluate the impact on their businesses and operations.
The Release expressly states that further action from the SEC may be forthcoming as the SEC will “determine whether further guidance or rulemaking relating to climate change disclosure is necessary or appropriate in the public interest or for the protection of investors.” Since its release, Congressman Spencer Bachus (R-AL) and others already have questioned the role of politics as the driving force behind the Release.
Practical Guidance for this Form 10-K Season
While it will take time to see the true impact of the Release on companies’ disclosure practices, we believe the Release raises four key issues that reporting companies should focus on now.
- With Form 10-K filing deadlines nearing for calendar year-end companies, companies and their advisers will need to digest the release and formulate a responsive disclosure philosophy promptly. Given the need for management to consider all relevant information, integrating the Release’s principles into 2009 Form 10-K disclosure will be challenging for some companies.
- Materiality judgments, while always difficult, may be particularly difficult with respect to disclosure of greenhouse gas emissions and climate change due to the state of the scientific and policy debates, as well as the high profile of the issue with the general public. In addition, companies should consider the need to balance the principle of erring on the side of disclosure, as advocated in the Release, against the Release’s admonition against “the accumulation of unnecessary detail or duplicative or uninformative disclosure that obscures material information.”
- Companies will need to monitor the evolution of climate change disclosure practices within their industry. While materiality and related disclosure decisions are, by their nature, unique to the facts and circumstances of a particular company at a particular time, we believe it is prudent for companies to track developing disclosure practices of similarly situated companies.
- The SEC may, formally or informally, act further with respect to disclosures related to greenhouse gas emissions and climate change. The Release expressly states that further action from the SEC may be forthcoming. In addition, we believe that if the SEC does not see additional and more detailed disclosures regarding climate change, we will see a responsive flow of comment letters that could by their nature impose de facto standards on all reporting companies.
We have been encouraging clients for some time to critically consider their climate change disclosure and update it as circumstances warrant. We reiterate our prior advice here. However, we are concerned that the Release, if read literally, also could require companies to assess the likelihood of passage of federal and other legislation, an impossible task in even the most sedate political times, and to craft their disclosure based upon that speculation. If this reading is intended by the SEC, that concept of disclosure could be read to apply not just to climate-related legislation, but also, for banks, to financial institution-related legislation and, for other industries, other legislation as well. A requirement of this nature clearly would be overbroad from the perspective of historical disclosure practices and would yield poor, defensively designed disclosure.
Additional information on the SEC’s open meeting adopting the release can be found under Troutman Sanders’ January 27, 2010 advisory.