SEC Issues Guidance on Climate Change Disclosures

Perhaps spurred on by the increases in climate change litigations, the United States Securities and Exchange Commission ("SEC"), on February 2, 2010, published an interpretive release (the "Release") to provide guidance to reporting companies on the impact that climate change issues have on existing SEC disclosure requirements. The Release is effective immediately and does not create new reporting requirements or modify existing ones, but rather seeks to clarify when a reporting company should consider disclosing the material impacts that climate change developments have on its business.

The Release cites evolving climate change legislation and regulation, shareholder demands for greater climate change disclosure, the increasing amount of information that reporting companies disclose outside of their SEC filings and historical SEC disclosure requirements concerning environmental matters as reasons why climate change disclosure guidance is warranted for reporting companies. Activists shareholder groups such as Ceres and some institutional investors, including CalPERS, have long called for such guidance and heralded the Release as an important step towards expanding investor knowledge. The Release was also applauded by New York Attorney General Andrew Cuomo, who had not only filed a petition with the SEC calling for such disclosure guidance, but also had investigated power companies under state law to determine whether they had properly disclosed to investors the financial risks posed by climate change. Attorney General Cuomo's investigations led to settlements with Xcel Energy, Dynegy and AES Corp, requiring that each company disclose risks associated with their greenhouse gas emissions.

The Release seeks to resolve some of the uncertainty on the part of reporting companies regarding what, exactly, should be disclosed. Specifically, the Release focuses on four existing disclosure requirements and four climate change issues that may need to be discussed within the framework of those existing disclosure requirements. The following is a summary of the four existing disclosure requirements where the Release suggests that climate change issues may need to be discussed.

Item 101 (Description of Business): Item 101 requires a description of the general development of a reporting company's business, including the business of its subsidiaries. This Item specifically requires disclosure as to the "material effects that compliance with Federal, State...