November 11, 2010
As 2010 draws quickly to a close, many public companies are beginning to
prepare their annual reports on Form 10-K to be filed with the SEC in early
2011. Those employees charged with drafting disclosure may find this summary of
the SEC’s guidance on climate change disclosure helpful. The SEC’s Interpretive
Guidance Regarding Disclosure Related to Climate Change,” was adopted Jan.
27, 2010, and posted on the SEC’s website on Feb. 2, 2010, which did not allow
for a great amount of time for digesting and drafting new responsive disclosure.
Salient Take-aways of the Release
- Current disclosure requirements are set forth in Regulation S-K.
These include Items 101 (Business), 103 (Legal Proceedings), 503(c) (Risk
Factors), and 303 (MD&A).
- These four topics are some of the ways climate change may trigger
disclosure required by the rules and regulations:
- Potential effect of pending/proposed legislation and regulation.
- Impact of treaties or international accords, including other
international activities in connection with climate change remediation.
- Indirect consequences of regulation or business trends, including
increased or decreased demand for products and services, and the
consequences of reputational damage.
- Physical impacts of climate change, such as the severity of weather
(for example, floods or hurricanes), sea levels, the arability of
farmland, and water availability and quality.
- For some registrants, risks associated with climate change may arise
from risks to entities other than the registrant itself. For example,
effects can impact a registrant’s personnel, physical assets, supply chain
and distribution chain.
- Current materiality standard remains in effect.
Information is material if there is a substantial likelihood that a
reasonable investor would consider it important in deciding how to vote or
make an investment decision. Stated slightly differently, information is
material if it would alter the total mix of available information. Any doubt
as to materiality must be resolved in favor of investors and disclosure.
- Management is expected to review all relevant information.
The SEC acknowledges that materiality determinations may limit what is
actually disclosed, but they should not limit the information that
management considers in making its determinations. This requirement is
linked to management’s assessment of whether sufficient disclosure controls
- Analysis for MD&A disclosure regarding uncertain future events
consists of two steps. For management to assess when a trend or
uncertainty is “known” (such as a known uncertainty in pending or proposed
legislation or regulation), the analysis is:
- Is the known trend, demand, commitment, event or uncertainty likely
to come to fruition? If management determines that it is not reasonably
likely to occur, no disclosure is required.
- If management cannot make that determination, it must evaluate
objectively the consequences of the known trend, demand, commitment,
event or uncertainty, on the assumption that it will come to fruition.
Disclosure is then required unless management determines that a material
effect on the registrant’s financial condition or results of operation
is not reasonably likely to occur.
- There is no certain future time period which is considered “the
future” when assessing if something is reasonably likely to occur in the
future. The SEC has not quantified a specific future time period
that must be considered in assessing the impact of a known trend, event or
uncertainty that is reasonably likely to occur. Materiality with regard to
contingent or speculative information or events depends on a balancing of
both the indicated probability that the event will occur, and the
anticipated magnitude of the event.
The release does not contain any new disclosure requirements, but was
intended by the SEC 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 for filing with the SEC and
for providing to investors.
McGuireWoods LLP assists large and small public companies in connection with
disclosure and compliance matters under the federal securities laws, and is
actively engaged in monitoring developments in this area. Our climate change
practice group consists of seasoned practitioners and consultants from our
environmental, energy, corporate and securities, capital markets, litigation and
government relations groups. We are available to assist with climate change and
greenhouse gas disclosure matters for our public clients.