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SEC Issues Guidance on Disclosure Related to Climate Change

Corporate and Securities Update

On February 2, 2010, the Securities and Exchange Commission issued an interpretive release1 designed to provide guidance to public companies on disclosures regarding the effects of climate change on their businesses. The interpretive release does not create new disclosure requirements or amend existing requirements, but rather expresses the SEC’s views on the application of existing disclosure requirements to climate change matters. This alert discusses the issues that the SEC suggested should be covered in the climate change disclosures as well as rules applicable to such disclosures.

Topics for Climate Change Disclosures Suggested by the SEC

The interpretive release, as well as the speech of the SEC Commissioner Luis A. Aguilar2, provided some practical guidance regarding issues that may prompt climate change disclosures.

Companies should discuss in their SEC filings:

  • the direct effect of environmental legislation, regulation and international treaties;
  • the indirect consequences of climate change; and
  • the impact of physical changes to our planet caused by the climate change (for example, rising seas, stronger storms, and increased drought affecting the distribution and production of goods and damaging property, plant and equipment).

 

 

MD&A

 

 

A public company must include a detailed MD&A section designed to provide material historical and prospective information enabling investors to assess the financial condition and results of operations of the company7. The MD&A requirements place particular emphasis on disclosure regarding trends, commitments and uncertainties that will have, or are reasonably likely to have, a material impact on the company’s liquidity, capital resources or results of operations. Depending on the business of the company, trends or uncertainties related to climate change issues may materially affect its business operations. The company should address, if material, the difficulties involved in assessing the effect of uncertain events and provide an indication of the time frame in which the company anticipates to resolve such uncertainties.

For example, public companies should assess whether enacted or pending climate change legislation or regulation is reasonably likely to have a material effect, positive or negative, on the company’s financial condition or results of operations. In the case of a known uncertainty related to such legislation, the company is required to analyze (i) whether the pending legislation or regulation is reasonably likely to be enacted, and (ii) whether, if enacted, the legislation or regulation is reasonably likely to have a material effect on the company. In addition to disclosing the potential effects of any pending legislation or regulation, the company would also disclose any material difficulties in assessing the timing and effect of such pending legislation or regulation.

Conclusion

In light of the SEC guidance, a public company, including a foreign private issuer, that is in the process of preparing its annual report or registration statement should:

  • review its disclosures related to the business description, legal proceedings that the company is involved in, risk factors and MD&A; and
  • evaluate whether additional or revised disclosure is necessary to reflect the risks or opportunities created for the company by the climate change.
  1. See SEC Release No. 33-9106, Commission Guidance Regarding Disclosure Related to Climate Change (February 2, 2010), which is available at http://www.sec.gov/rules/interp/2010/33-9106.pdf
  2. See Speech by SEC Commissioner: Responding to Investors’ Requests for SEC Guidance on Disclosures of Risks Related to Climate Change (January 27, 2010), which is available at http://www.sec.gov/news/speech/2010/spch012710laa-climate.htm
  3. In recent years, the Kyoto Protocol and the European Union Emissions Trading System have impacted public companies with operations outside of the United States. The Kyoto Protocol was adopted in Kyoto, Japan, on December 11, 1997 and became effective on February 16, 2005. The European Union Emissions Trading System, launched in 2005 as an international “cap and trade” system of allowances for emitting carbon dioxide and other greenhouse gases, was built on the mechanisms set up under the Kyoto Protocol. The United Nations Climate Conference may lead to future international treaties focused on remediating environmental damage caused by greenhouse gases.
  4. See Item 101(c)(1)(xii) of Regulation S-K and Item 4.B.8 of Form 20-F.
  5. See Item 103 of Regulation S-K and Item 8.A.7 of Form 20-F.
  6. See Item 503(c) of Regulation S-K and Item 3.D of Form 20-F.
  7. See Item 303 of Regulation S-K and Items 4.D and 5 of Form 20-F.

Notice: The purpose of this newsletter is to review the latest developments which are of interest to clients of Blank Rome LLP. The information contained herein is abridged from legislation, court decisions, and administrative rulings and should not be construed as legal advice or opinion, and is not a substitute for the advice of counsel.