The Securities and Exchange Commission Issues Interpretive Guidance on Disclosure of Climate Change Impacts

On February 8, 2010, the Securities and Exchange Commission (SEC or Commission) issued its first official interpretive guidance to public companies regarding disclosure of climate change impacts in reports and other documents filed with that agency. Commission Guidance Regarding Disclosure Related to Climate Change1 (Interpretive Release) is of significance to reporting companies for two major reasons:

It provides useful, substantive interpretive guidance on the specific disclosures required of public companies when their financial status is materially affected by physical, legislative or regulatory impacts of climate change. It is the SEC's first major acknowledgement that climate change issues may, under appropriate factual scenarios, be sufficiently financially "material" to merit disclosure. Although the significance of the first reason is obvious, that of the second one may not be as clear. In any event, neither reason should be taken lightly. That the Commission has stepped forward to promulgate a "final rule" in an area as contentious and controversial as climate change is a strong signal that should be heeded. The SEC advises that it "will monitor the impact of this interpretive release on company filings as part of our ongoing disclosure review program."2 Therefore, potentially-affected reporting companies should act expeditiously to evaluate their present disclosure policies and practices to be assured that they comport with the guidance provided in the Interpretive Release.

The essential message here is that climate change issues are now "fair game" for SEC regulatory review and enforcement action. As one of the authors predicted in an earlier writing:

Securities law ... will likely have an increasingly greater impact on corporate action, but how much so will depend on the political will of government and the advocacy of plaintiffs. The "take away" message for the corporate community, therefore, is that it should prepare for a new world of demanding climate-change standards.3

The discussion below consists of two Parts. Part I discusses the specific disclosure provisions identified by the Commission as the most likely candidates for climate change disclosure. This Part also discusses certain other provisions that Commission staff may determine are pertinent as they gain greater expertise in this new area. Part II discusses some considerations that may be useful to companies seeking to integrate greenhouse gas (GHG) management and reporting into their overall corporate strategic planning and implementation processes. This latter Part has been included because, given the multiple and complex regulatory structures that are now emerging to address the climate change phenomenon, a comprehensive, integrated governance and compliance approach would best serve the interests of companies and their stakeholders.

Finally, we note that both Parts set out very basic discussions of the new corporate governance and regulatory compliance environments that have been driven by climate change developments. As such, they are at most only a starting point for the thorough, in-depth analyses required for proper compliance and effective governance.

1. Specific Disclosure Requirements Implicated by Climate Change Impacts

   1. Summary of Disclosure Requirements

   The following disclosure requirements include those identified in the Interpretive Release, as well as certain other ones that are potentially applicable.

   1. Disclosure Requirements Discussed in the Interpretive Release

   Description of Business. Disclosure is required of the development, structure and nature of the business. This includes any "material effects" of environmental compliance and "material estimated capital expenditures for environmental control facilities."4 Legal Proceedings. Disclosure is required of "material pending legal proceedings, other than...