Allyn Stern Authors Bloomberg Environment Article on SEC Environmental Liability Reporting Threshold
Of Counsel Allyn Stern (Seattle) authored a September 27 "Insights" article in Bloomberg Environment titled "SEC Increasing Reporting Threshold for Environmental Liabilities." The article discusses the amendments proposed by the Securities and Exchange Commission (SEC) to modernize its regulation requiring registrants to report environmental penalties and certain other environmental information, providing a more thorough follow-up to a previous B&D news alert on the same topic authored by Allyn and Principal Mark Duvall (Washington, DC).
Since 1971, companies subject to Securities and Exchange Commission reporting have been required to disclose certain environmental obligations to aid investors looking to make informed decisions. In 1982, the threshold for reporting those obligations was set at $100,000. Now, for the first time in more than 30 years, the SEC is proposing changes to Regulation S-K that would increase the reporting threshold. While this increase will not impact the necessity to disclose large environmental obligations, it can reduce disclosure costs and some reporting burden resulting from smaller environmental liabilities. The SEC integrates all of the required disclosures into Regulation S-K.
Allyn's article highlights two sections regulating nonfinancial disclosures that are particularly relevant for environmental disclosure. Item 103: Legal Proceedings applies to pending legal proceedings and requires disclosure of “material” litigation, i.e., other than “ordinary routine litigation incidental to the business.” Instruction 5 to this item designates an environmental penalty of $100,000 or greater as not being “ordinary” litigation. Thus, the SEC requires disclosure of any proceeding under environmental laws to which a governmental authority is a party unless the registrant reasonably believes it will not result in sanctions of $100,000 or more.
Item 101: Description of Business requires companies to disclose the material effects of compliance with federal, state, and local environmental laws on their capital expenditures. The proposed change is to Item 101(c)(1)(xii) requiring a description of the registrant’s business to provide more flexibility to determine the appropriate timeframe for disclosure of estimate capital expenditures for environmental control facilities. Taking what it refers to as a more “principles-based” approach, the SEC is proposing to modify the current regulation to be less prescriptive. Currently, disclosure of estimated capital expenditures for environmental control facilities is required if such expenditures are material and must be reported for the current fiscal year, succeeding fiscal year, and any other periods the registrant deems material.
The principles-based approach versus a prescriptive-based approach may be relevant to shareholders and investors concerned about climate change reporting. This SEC proposal does not address issues related to climate change, as it decided to select the more principles-based approach, leaving it to each regulated company to determine whether climate information is material. The agency is taking comment on whether the principles-based approach to disclosure will provide the right amount of information to evaluate environmental risks. This could be an area of interest for shareholders and investors looking for more climate disclosure. Comments on the proposal are due by October 22, 2019.