Steptoe & Johnson

SEC Issues Guidance Regarding Climate Change Disclosures Under Existing Rules

Regulation S-K provides the framework that publicly traded companies must follow when making disclosures and reports to the Securities and Exchange Commission (SEC). These disclosures include analyses of the potential positive or negative impacts on a company due to new laws and regulations or other developments affecting a company's business. On February 2, 2010, the SEC issued an interpretive release regarding disclosures associated with climate change. This document is intended to assist publicly traded companies in assessing whether climate-related impacts on their businesses will require disclosures to the SEC under Regulation S-K. The interpretive release will be effective when published in the Federal Register, but you can downlaod a pre-publication copy by clicking this link.

Specific Disclosures Related to Climate Change

1. Impact of Legislation and Regulation
The Agency identifies recent federal and state legislation and regulatory developments that may trigger reporting under Regulation S-K. These include EPA's endangerment finding for GHGs under the Clean Air Act, EPA's mandatory GHG reporting rule, proposed Cap & Trade Legislation and several state laws related to GHG emissions. The guidance highlights the following possible consequences of pending legislation and regulation related to climate change:

• Costs to purchase, or profits from sales of, allowances or credits under a "cap and trade" system;
• Costs required to improve facilities and equipment to reduce emissions in order to comply with regulatory limits or mitigate the financial consequences of a "cap and trade" regime; and
• Changes to profit or loss arising from increased or decreased demand for goods and services produced by the registrant arising directly from legislation or regulation, and indirectly from changes in costs of goods sold.

2. International Accords
The impacts of international treaties and agreements, including the Kyoto Protocol, European Union Emissions Trading System and any other potential future agreements related to climate change are identical to those outlined above for domestic legislation and regulation.

3. Indirect Consequences of Regulation or Business Trends
The guidance notes that legal, political and scientific developments regarding climate change may create new opportunities or risks for registrants. The examples provided in the guidance include:
 
• Decreased demand for goods that produce significant GHG emissions
• Increased demand for goods that result in lower emissions than competing products
• Increased competition to develop innovative new products
• Increased demand for generation and transmission of energy from alternative sources
• Decreased demand for services related to carbon based energy sources, such as drilling services or equipment maintenance services

All of these potential impacts could trigger reporting and disclosure obligations.

4. Physical Impacts of Climate Change
The guidance recommends that registrants consider whether significant physical impacts related to climate change could impact operations and results. These risks include businesses that are affected by severe weather or climate-related events. Severe weather can potentially damage physical facilities or disrupt manufacturing and distribution systems of both the registrants and their suppliers. The guidance also discusses the potential impact of rising sea levels on coastal facilities and operations.

Conclusion
This SEC guidance is the Agency's first formal recognition of the potential impacts of climate change related issues affecting publicly traded companies, but it is far from specific and there are serious questions as to whether certain potential impacts are material or constitute known trends. The guidance includes no specific references regarding these determinations and this ambiguity will likely make enforcement actions for disclosure violations related to climate change very difficult. The SEC plans to monitor these issues and their impact on corporate reporting and disclosures and may develop more specific disclosure requirements in the future.