Securities Alert
February 2010
Authors:
Stephen K. Rhyne
steve.rhyne@klgates.com
704.331.7441
Sean M. Jones
sean.jones@klgates.com
704.331.7406
Kristy T. Harlan
kristy.harlan@klgates.com
206.370.6651
K&L Gates includes lawyers practicing
out of 35 offices located in North
America, Europe, Asia and the Middle
East, and represents numerous GLOBAL
500, FORTUNE 100, and FTSE 100
corporations, in addition to growth and
middle market companies,
entrepreneurs, capital market
participants and public sector entities.
For more information, visit
www.klgates.com.
SEC Posts Guidance on Climate Change
Disclosure
On Tuesday, February 2, 2010, the Securities and Exchange Commission (SEC)
posted on its website an interpretive release providing guidance to public companies
regarding disclosures to be made in SEC filings about the consequences of climate
change. As described in our January 28 alert “SEC Approves Interpretive Release on
Climate Change Disclosure,” the SEC had approved the release at its open meeting
on January 27, 2010. In addition to highlighting areas where climate change may
trigger disclosure requirements, as described in our earlier alert, the interpretive
release also provides a more complete analysis of the SEC’s view of the obligations
of public companies, and the process to be undertaken by them, regarding climate
change-related disclosure.
Potential Topics of Disclosure. As an interpretive release, the SEC’s guidance does
not create new legal requirements or modify existing ones. Instead, the guidance is
intended to help public companies determine what climate change-related disclosures
need to be made pursuant to existing disclosure rules relating to a company’s risk
factors, business description, legal proceedings, and management’s discussion and
analysis (MD&A). In its interpretive release, the SEC highlighted the following
areas as examples of where climate change and its consequences, if material to a
company’s business, may trigger disclosure requirements:
•
•
•
•
impact of existing and pending laws and regulations;
risks or effects of international accords and treaties relating to climate
change;
indirect consequences of legal, technological, political and scientific
developments regarding climate change that may create new opportunities
or risks (e.g., increased or decreased demand for a company’s product due to
the greenhouse gas emissions associated with the product); and
actual and potential physical impacts of climate change on the company’s
business.
Focus on MD&A. Much of the SEC’s focus in the interpretive release related to
reviewing its past guidance regarding disclosures required in MD&A, particularly
the need to provide information to allow investors to assess the future prospects of
the company, and how this guidance should be applied in the context of evaluating
climate change disclosure. The SEC emphasized the requirement that a public
company disclose in its MD&A any known trends or uncertainties that are
reasonably likely to have a material effect on the company’s financial condition or
operating performance. The SEC said that there was no prescribed time horizon for
determining by when such a trend or uncertainty must occur. Instead, companies
should apply the general standard for determining the materiality of contingent or
speculative information or events, which requires that the probability of the event
occurring be weighed against its anticipated magnitude.
Securities Alert
Determining Materiality. The SEC reiterated the
twofold assessment that a public company should
undertake in determining whether a particular
known trend or uncertainty (including a trend or
uncertainty related to climate change) should be
considered material and therefore disclosed. First, a
public company must assess whether the trend or
uncertainty is likely to come to fruition. If it is not
reasonably likely to occur, no disclosure is required.
If the company cannot make that determination, it
must evaluate objectively whether the consequences
of the trend or uncertainty would be material
assuming that the trend or uncertainty comes to
fruition. Disclosure is then required, the SEC said,
unless the company determines that a material effect
on the company’s financial condition or results of
operations is not reasonably likely to occur.
Requiring disclosure in such circumstances would
be consistent with the SEC’s caution earlier in the
release that when the materiality of a particular
disclosure is in doubt, “it is appropriate that these
doubts be resolved in favor of those the statute is
designed to protect.”
The SEC also indicated that in preparing its MD&A,
a public company must balance, on the one hand,
including all information that is material while, on
the other hand, eliminating immaterial information
and duplicative or uninformative disclosure that may
obscure material information. The SEC cautioned,
however, that when a company is making its
materiality determinations it should consider all
relevant information, even information that is not
material or required to be disclosed. It also
cautioned that public companies should have
sufficient disclosure controls and procedures to
process this information, including its timely
collection and evaluation.
Please see our December 2009 alert, “Climate
Change Disclosure for U.S. Public Companies,”
which describes the current SEC disclosure
standards and requirements as they relate to climate
change, including Regulation FD’s prohibition
against selective disclosure of material information.
The alert also discusses various factors public
companies should consider when evaluating what
disclosures are appropriate. These factors include
many of the significant legislative, regulatory and
litigation developments that occurred in 2009.
Additionally, in another December alert,
“Addressing Climate Change Through Corporate
Governance,” we discuss these 2009 developments,
as well as the increased investor and competitive
focus on climate change, and we suggest certain
corporate governance practices that can be key tools
in addressing this changing landscape.
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GLOBAL 500, FORTUNE 100, and FTSE 100 corporations, in addition to growth and middle market companies, entrepreneurs, capital market
participants and public sector entities. For more information, visit www.klgates.com.
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February 2010
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