SEC Approves Interpretive Guidance on Disclosure Related to Climate Change

On January 27, 2010, the Securities and Exchange Commission voted 3-2 to approve interpretive guidance on existing SEC disclosure requirements as they apply to climate change.

Chairman Mary Schapiro emphasized that the guidance will not represent the Commission taking a position on any facts relating to climate change or global warming. The guidance also will not impose any new legal requirements or modify existing ones. For example, the guidance will not, in and of itself, require an issuer to disclose its carbon footprint or the steps it is taking to reduce emissions.

Rather, the guidance will aim to provide clarity on disclosure relating to climate change, including in an issuer’s risk factors, business description, legal proceedings and management’s discussion and analysis.

Specifically, the interpretive guidance will highlight the following areas as examples in which climate change may affect disclosure requirements:

• Impact of Legislation and Regulation: In assessing potential disclosure obligations, an issuer should consider whether the impact of existing laws and regulations regarding climate change is material. An issuer also should evaluate the potential impact of pending legislation and regulation in this area (e.g., proposed cap-and-trade legislation).
  
• Impact of International Accords: An issuer should consider, and disclose when material, the risks or effects on its business of international accords and treaties relating to climate change (e.g., the Kyoto Protocol).
  
• Indirect Consequences of Regulation or Business Trends: Legal, technological, political and scientific developments regarding climate change may create new opportunities or risks for companies. For example, an issuer may face decreased demand for goods that produce significant greenhouse gas emissions or increased demand for goods that result in lower emissions than competing products. An issuer should consider disclosure relating to the actual or potential indirect consequences it may face as a result of these developments, including, for example, reputational harm.
  
• Physical Impacts of Climate Change: An issuer should evaluate for disclosure purposes the actual and potential material impacts of environmental matters on its business. Rising seas, stronger storms and increased drought, for example, could have a material effect on production and distribution, as well as damage property, plant and equipment. Other examples include disclosure relating to changes in the availability of natural resources on which an issuer relies or hazards to coastal properties securing loans made by an issuer.

Commissioners Troy Paredes and Kathleen Casey dissented from the vote. They cited a number of concerns, including that:

• The Commission has more pressing priorities.
• The guidance could foster confusion and uncertainty given the speculative nature of determining the potential reputational and physical effects on an issuer of climate change.
• The guidance could result in additional disclosure that is not useful to investors.
• Existing rules already suffice to result in appropriate disclosure on climate change-related issues.
• Climate change continues to be debated vigorously and the Commission could be viewed as having taken a position on the issue.

The Commission’s press release relating to the guidance can be found here. The Commission has indicated that it will post the interpretive release as soon as possible.

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