January 31, 2010 16:00
It has been our view for a number of years that climate change disclosures are not for every publicly traded company. What is for each of those companies, however, is the need to take a close look at the risks and opportunities posed by climate change and to assess their importance for the company's specific circumstances.
The Securities & Exchange Commission has now reached a similar conclusion. In a press release this past Wednesday, the SEC announced its decision (3-2 on partisan lines) to provide interpretive guidance on existing SEC disclosure requirements applicable to legal and business developments relating to climate change.
As stated in the press release,
http://www.sec.gov/news/press/2010/2010-15.htm, the Commission's interpretive releases "are intended to provide clarity and enhance consistency for public companies and their investors." As further stated by Commissioner Schapiro, the application of this guidance to climate change is not an opinion on "whether the world's climate is changing, at what pace it might be changing, or due to what causes." The SEC expressly was not "weighing in" on those topics.
Nonetheless, some who are familiar with the SEC's inner workings were surprised and acknowledged that it is a big deal for the SEC to take such a step in confirming its interpretation of the applicable disclosure regulations as they relate to global warming risks. Environmentalists and leading state pension fund investors have long argued that the SEC should issue such guidance and formally requested such action in a peition filed with the SEC in 2007.
The guidance identifies various areas where disclosure might be required:
1. Legislation and regulation that may impact a business. (e.g., the effect a carbon tax may have on revenue)
2. International agreements that may impact a business. (e.g., the lapse of the Kyoto Protocol may change the need for carbon credits)
3. Regulation and business trends that may have indirect consquences on a business (e.g., refrigerator manufacturers may need to assess energy efficiency as a business trend)
4. Physical impacts of climate change. (e.g., a shipping company may need to evaluate the effect of a melting icecap and the opening of the Northwest Passage)
After reading this list, some will certainly conclude that the guidance offers nothing new. Each of these subjects falls within one of the disclosure requirements already on the books for many years. For example, Item 303 of Regulation S-K requires the disclosure in management's discussion and analysis of circumstances materially affecting one's business. If rising sea levels can be determined to pose a material risk to casino operators on the Atlantic seaboard, then disclosure is required. In similar fashion, brethren in Nevada may need to discuss the impact of perpetual drought in the American southwest. Whether these outcomes are the result of climate change is not relevant to the disclosure obligation. Whether they are material is.
Likewise, Item 101 would capture disclosure of legislation and regulation material to one's operations. If a carbon tax or cap-and-trade program has a material impact on one's bottom line, one does not need the new guidance to make disclosure.
On the other hand corporate disclosures to date are uneven. The Carbon Disclosure Project,
http://www.cdproject.net, has been soliciting disclosure from the world's publicly-traded companies for several years. A review of those reports is striking in the variation of both the scope and detail of the disclosures. As a result of the guidance, however, one can now expect disclosing institutions to be reviewing the disclosures of their peers, in order to assess more precisely what needs to be said.
The SEC's decision was not the first regulatory pronouncement on climate change disclosure. Last year the National Association of Insurance Commissioners promulgated rules for their regulated community (insurance companies). We do not expect the SEC's guidance to be the last word either. Regulated entities will do well to pay close attention.