SEC Issues Interpretive Guidance on Climate Change Disclosures

January 28, 2010

At its open meeting on Jan. 27, 2010, the SEC, by a 3 – 2 vote, approved an interpretive release addressing a public company’s disclosure obligations with respect to business or legal developments related to climate change. Since interpretive guidance clarifies existing disclosure requirements, this guidance would be effective immediately, including for companies in the midst of preparing their annual reports on Form 10-K for the year ended Dec. 31, 2009.

The relevant rules addressed by the guidance cover a company’s risk factors, business description, legal proceedings, and management discussion and analysis (MD&A).

Commission Chairman Mary Shapiro pointed out that by providing this guidance, the Commission was not “opining on whether the world’s climate is changing; at what pace it might be changing; or due to what causes. Nothing that the Commission does today should be construed as weighing in on those topics.”

The SEC's press release announcing the interpretative guidance states that the following areas are examples of where climate change may trigger disclosure requirements:

  • Impact of Legislation and Regulation: When assessing potential disclosure obligations, a company should consider whether the impact of certain existing laws and regulations regarding climate change is material. In certain circumstances, a company should also evaluate the potential impact of pending legislation and regulation related to this topic.
  • Impact of International Accords: A company should consider, and disclose when material, the risks or effects on its business of international accords and treaties relating to climate change.
  • 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 instance, a company 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. As such, a company should consider, for disclosure purposes, the actual or potential indirect consequences it may face due to climate change related regulatory or business trends.
  • Physical Impacts of Climate Change: Companies should also evaluate for disclosure purposes the actual and potential material impacts of environmental matters on their business.

However, it is clear from statements made at the Commission’s open meeting that important details regarding this guidance will be forthcoming in the release.

Given the Commission’s stated agnosticism regarding the reality of climate change and its effects (at least as to causation), disclosures regarding the “physical impacts of climate change” are likely to relate to the effects of observed environmental phenomenon, like increased instances of severe storms, other changes in weather patterns or rising sea levels, are having, or may have, on a company’s business. When considering the appropriateness of disclosure regarding possible future effects of climate change, a company’s management would presumably apply the same analytic framework already outlined for disclosure regarding “known trends” in MD&A.

For the most part, it appears this guidance is consistent with the types of disclosures we observed in our reviews of climate change disclosures in 2008 and 2009. However, it is almost certain that this step by the SEC will prompt more companies to focus attention on whether these types of disclosures are appropriate for them. Even companies that are making climate change disclosures will need to consider whether they need to make additional or different disclosures in light of this release.

The McGuireWoods Climate Change Practice Group will provide analysis of the SEC’s interpretive release when it is available.

McGuireWoods LLP regularly 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 these areas. Our climate change practice group consists of seasoned practitioners and consultants from our environmental, energy, corporate and securities, capital markets, litigation and government relations departments. We are available to assist with climate change and GHG disclosure matters for our public clients.

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