Beveridge & Diamond

SEC Issues Guidance on Climate Change Disclosure Requirements

Beveridge & Diamond, P.C., February 5, 2010

UPDATE:  The interpretive release was published in the Federal Register on February 8, 2010.  A copy of the release is available here.  

On February 2, 2010, the Securities and Exchange Commission ("SEC") issued guidance clarifying that existing SEC rules require publicly-held companies to disclose material climate-related information. The guidance, which was issued in the form of an interpretive release, does not create new legal requirements or modify existing requirements. Instead, the guidance underscores the provisions of existing reporting rules that make it necessary for SEC-reporting companies to assess whether climate-related risks or opportunities – both positive and negative – have a material impact requiring disclosure. The SEC indicated that it may consider additional guidance or rulemaking relating to climate-related disclosure following a public meeting to be scheduled in Spring 2010.

The interpretive release will be effective upon publication in the Federal Register. A pre-publication copy of the release is available here


In a public meeting held January 27, 2010, the SEC voted 3-2, along party lines, to issue guidance clarifying that existing SEC disclosure rules require public companies to consider climate-related information when reporting other financial risks. The decision to hold a public meeting was in part a response to a 2007 investor petition seeking SEC guidance on climate-related disclosure obligations.

Additional background relating to the 2007 petition and related activity is available here. A webcast of the January 27, 2010 meeting may be viewed here.

Overview of Rules Requiring Disclosure of Climate Change Issues

The interpretive release outlines the "most pertinent" SEC non-financial statement disclosure rules and regulations that may give rise to climate-related disclosure obligations. Although not exhaustive, the following list summarizes the key disclosure provisions identified in the guidance. The SEC states in the interpretive release that disclosure of the impact of climate change could be required under each of the items discussed below.

Description of Business. Item 101 of Regulation S-K requires disclosure of the material effects on a public company’s capital expenditures, earnings and competitive position of compliance with federal, state, and local environmental requirements. Disclosure of material estimated capital expenditures for environmental control facilities also is required.

Legal Proceedings. Item 103 of Regulation S-K generally requires a public company to describe material pending legal proceedings, other than ordinary routine litigation incidental to business, to which the company is a party or of which any of its property is the subject. Specific requirements apply to certain types of environmental litigation that otherwise might not be deemed material to a company. In particular, proceedings involving environmental matters in which a governmental authority is a party must be disclosed if there are potential monetary sanctions, unless the company reasonably believes that monetary sanctions will be less than $100,000.

Management’s Discussion and Analysis ("MD&A"). Item 303 of Regulation S-K requires a public company to disclose known trends, material events and uncertainties that would cause financial information not to be necessarily indicative of future financial condition. Prior SEC interpretive releases have provided guidance on MD&A disclosure obligations, and have indicated, inter alia, that disclosure might be required due to new legislation requiring future capital expenditures to install pollution control devices, designation of a company as a "PRP" at a Superfund site, and recurring costs associated with managing hazardous substances and pollution.

Risk Factors. Item 503 of Regulation S-K requires a company, where appropriate, to provide a discussion of the most significant factors that would make investment in the company’s securities speculative or risky. This Item does not specifically mention environmental risks, but such risks must be disclosed if significant to the company or the offering.

Issues that May Trigger Climate-Related Disclosure Requirements

The SEC release describes four specific areas in which climate-related issues may trigger corporate disclosure obligations.

Impact of Legislation and Regulation. The guidance identifies a number of significant developments in federal and state legislation and regulation regarding climate change, including in particular the Environmental Protection Agency’s ("EPA") endangerment finding for GHGs under the Clean Air Act and mandatory GHG reporting rule; proposed federal legislation in the U.S. Congress, and the California Global Warming Solutions Act of 2006. According to the guidance, these developments may trigger disclosure obligations pursuant to all of the provisions identified above. For example:

  • Item 101 (Description of Business) may require the disclosure of environmental compliance costs relating to climate change, such as the cost to purchase allowances or credits under a cap-and-trade scheme or the cost incurred to improve facilities and equipment to reduce GHG emissions to comply with regulatory limits. In addition, climate-related legislation or regulation may give rise to changes in earnings arising from increased or decreased demand for goods and services, or from changes in costs of goods sold.
  • Item 303 (MD&A) could require disclosure of the potential effect of climate-related legislation or regulation, as well as material difficulties involved in addressing the timing and effect of the pending legislation or regulation. Changes in law and related developments also could provide new opportunities (such as the sale of offset credits) for some companies that, if material, could trigger a disclosure obligation.
  • Item 503(c) (Risk Factors) may require disclosure of new risks from climate change developments, particularly for companies that are highly sensitive to the regulation of GHGs (e.g., companies in the energy sector), or for companies that may face significantly different risks compared to companies that are currently reliant on products that emit GHGs (e.g., companies in the transportation sector).

International Accords. The guidance highlights activities in the international community that address climate change, including the Kyoto Protocol and the European Union Emissions Trading System. The guidance also notes that international negotiations pursuant to the United Nations Convention on Climate Change may form the basis for future international treaties. Companies are expected to consider and disclose the material impacts of treaties or international accords on business activities, and the potential sources of disclosure obligations related to international accords are the same as those outlined with respect to domestic legislation and regulation (see above).

Indirect Consequences of Regulation or Business Trends. The guidance notes that legal, technological, political, and scientific developments regarding climate change may create new opportunities and risks for companies by creating demand for new products and services, or by decreasing demand for existing products or services. These indirect consequences may have material impacts on a company requiring disclosure. For example:

  • Disclosure of business trends or risks with particularly significant impacts on a company’s operations, such as planned material acquisitions of plants or equipment might be needed in the description of a company’s business.
  • Indirect consequences of decreased demand for goods that produce significant GHGs or increased demand for generation and transmission of energy from alternative energy sources might need to be included as risk factors, or might need to be disclosed in the MD&A section.
  • The indirect impact of climate change on a company’s reputation might also be a new risk factor. A company may need to consider whether the public perception of any publicly available data relating to its GHG emissions could expose the company to adverse impacts resulting from reputational damage.

Physical Impacts of Climate Change. The guidance directs public companies to consider whether significant physical impacts of climate change have the potential to affect operations and results. According to the SEC, companies whose businesses may be vulnerable to severe weather or climate-related events should consider disclosing the material risks of such events in SEC filings. For example:

  • Severe weather may cause catastrophic harm to physical plants and facilities and has the potential to disrupt manufacturing and distribution processes.
  • Companies with operations concentrated on coastlines may suffer property damage and disruptions to operations.
  • Disruptions to the operations of major customers or suppliers from severe weather events, such as hurricanes or floods, may have indirect financial and operational impacts.

Limitations of the Guidance and Practical Impact

Although the guidance marks the SEC’s first formal recognition that public companies must specifically consider climate-related information in public disclosures, it leaves open key questions regarding the materiality of climate-related impacts and whether such impacts constitute known trends within the meaning of SEC reporting rules. For example, the guidance does not specify which sources can be relied upon for scientific information relating to the physical impacts of climate change or how companies should determine the materiality of varying provisions in proposed climate-related legislation. These unanswered questions, coupled with the SEC’s lack of experience in legal and scientific environmental issues, may affect the SEC’s ability to bring enforcement actions for violations of climate-related disclosure obligations.

Next Steps

The SEC plans to monitor the impact of the guidance on corporate filings as part of its ongoing disclosure review program. In addition, the SEC’s Investor Advisory Committee is considering climate change disclosure issues as part of its overall mandate to provide advice and recommendations. The SEC is planning to hold a public roundtable on disclosure issues relating to climate change in Spring 2010 to determine whether further guidance or rulemaking relating to climate change is necessary.

For more information, please contact Holly Cannon at (202) 789-6029,, or Lauren Hopkins at (202) 789-6081,




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