Remind Me Again, What Exactly are We Supposed to Discuss: Climate Change Disclosure

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 Release, “Commission 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:
    1. Potential effect of pending/proposed legislation and regulation.
    2. Impact of treaties or international accords, including other international activities in connection with climate change remediation.
    3. Indirect consequences of regulation or business trends, including increased or decreased demand for products and services, and the consequences of reputational damage.
    4. 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 exist.
  • 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:
    1. 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.
    2. 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.

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