An Overview of the Commission Guidance Regarding Disclosure Related to
Climate Change
Kyle Simon
I. Introduction
On January 27, 2010, the SEC voted to issue the Commission Guidance Regarding
Disclosure Related to Climate Change (the “Guidance”), an interpretive guidance to inform
companies when to disclose information related to climate change based on the SEC disclosure
requirements already in place. As stated in a press release by the SEC, “interpretive releases do
not create new legal requirements nor modify existing ones, but are intended to provide clarity
and enhance consistency for public companies and their investors.” The release was passed by a
3-2 vote split on party lines. SEC Chairman Mary Schapiro has stated that the Guidance is not
meant to give an opinion on the global warming debate, but others have viewed the Guidance as
a political move. Kathleen Casey, one of the Republican Commissioners at the time of issuance,
thought the “purpose of this release is to place the imprimatur of the commission on the agenda
of the social and environmental policy lobby, an agenda that falls outside of [the SEC’s]
expertise.”
After giving an overview of the guidance, some practical effects of the Guidance are
considered. Next, the likelihood that international accords will effect disclosure requirements
related to climate change and some examples of large company 10-K’s are investigated. All in
all, the Guidance seems to serve as a helpful tool for both companies and investors.
II. Overview of the Guidance
The Guidance is divided into four main parts: The background and purpose of the
Guidance, historical background of SEC environmental disclosure, overview of rules requiring
disclosure of climate change issues, and how climate change may trigger related disclosures.
The overview of the rules themselves is subdivided into description of business, legal
proceedings, risk factors, management’s discussion and analysis (“MD&A”), and foreign private
issuers. The section on triggers for disclosure is subdivided into impact of legislation and
regulation, international agreements, indirect consequences of regulation or business trends, and
physical impacts of climate change.
A. Introduction and Purpose
The Guidance begins with an introductory section laying out the background and purpose
of the Guidance. The opening suggests that the Guidance was issued in response to several
factors including (1) growing national concern over climate change, (2) international, federal,
state, and local laws and regulations on climate change, (3) possible related laws in the future,
and (4) business concerns over the effects of climate change. The SEC states the purpose of the
Guidance as an attempt “to assist companies in satisfying their disclosure obligations under the
federal securities laws and regulations.” As discussed in the introduction of this paper, the
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Guidance is meant to guide reporting companies through the already existing securities
disclosure laws, not to create new laws regarding disclosure.
The reasons for issuing the Guidance revolve around current and future concerns over
climate change and how it ought to be addressed. Media coverage of climate change is certainly
apparent, although it has been suggested that coverage in the United States has been stunted in an
attempt to avoid being perceived as having a political agenda (see Liisa Antilla’s study of media
coverage in the journal Public Understanding of Science for more information). Regard for
international accords in deciding to issue the Guidance comes from the Kyoto Protocol, the
Copenhagen Conference, and the expectation of future conferences regarding climate change
(already the Cancun Agreements and the recent Durban Climate Change Conference). Important
federal approaches to climate change are indicated by the EPA in its Current and Near-Term
Greenhouse Gas Reduction Initiatives, which also lists initiatives by agencies other than the
EPA. The Guidance also suggested that businesses have voiced concerns over the potential
impacts of climate change. These businesses include AIG, Pepsi, Google, Ford, and other giants
(see Appendix F in the Petition for Interpretive Guidance on Climate Risk Disclosure).
Physical risks brought about by climate change are addressed as both direct and indirect
potential risks for businesses. Future weather patterns may directly impact various components
of a registrant’s business such as its assets or supply chain. Insurance companies in particular
may be at risk. One other direct risk example the Guidance gives is a reduced demand for
heating services if there are warmer temperatures. An indirect risk would be a financial risk
that arises from risks to other entities that effect the registrant. The example given in the
Guidance is the risk to a company dependent on an agricultural product supplier subject to
droughts or floods.
Further background is produced by the Guidance with regard to non-SEC disclosure
currently occurring both by regulation and voluntary disclosure. In 2010, the EPA began
requiring disclosure of greenhouse gas (“GHG”) emissions by certain large GHG emitters. The
requirement was designed to cover 85% of the GHG emissions in the U.S. The Climate Registry
provides a forum and standards for reporting GHG emissions throughout North America. The
Carbon Disclosure Project works on behalf of institutional investors to collect and report
emissions, risks, and opportunities on over 2,500 companies. The Global Reporting Initiative is
the source of a sustainability reporting framework derived from various institutions worldwide.
While these sources of information provide information to investors, the Guidance warns
registrants that the information disclosed voluntarily to some of these sources may be required
under the securities laws.
B. Historical Background
As historical background, the Guidance discusses a prior instance where rules were
adopted regarding environmental law compliance and background on materiality of information.
The Guidance points out that environmental issues were first addressed in an interpretive release
by the SEC in the early 1970s. The interpretive release stated that registrants may need to
disclose financial impacts resulting from environmental law compliance. By 1982, rules were
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adopted in Release No. 33-6383 (47 FR 11380) regarding the impacts of compliance with laws
protecting the environment. [what are rules? Cite?]
Regarding materiality, the Guidance, citing Basic Inc. v. Levinson, 485 U.S. 224 (1998)
and TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438 (1976) says “information is material if
there is a substantial likelihood that a reasonable investor would consider it important in deciding
how to vote or make an investment decision, or, put another way, if the information would alter
the total mix of available information.” The Guidance also states that doubts on whether
information ought to be disclosed should be resolved in favor of disclosure. This is the
background the SEC considers when taking agency action.
C. Overview of Rules Requiring Disclosure of Climate Change Issues
This section lays out those non-financial rules of disclosure that may require climate
change related disclosure. The Guidance begins with description of business and legal
proceedings, then briefly covers risk factors before a larger discussion of MD&A. The Guidance
also specifies how certain rules may affect foreign registrants. After this overview, the next
section discusses how these disclosure requirements may apply to specific climate change issues.
1. Descriptions of Business. Item 101 in Regulation S-K requires a description of the registrant’s
business and the business of any subsidiaries. In particular, Item 101(c)(1)(xii) requires
disclosure of the material effects that compliance with environmental protection laws might have
on “the capital expenditures, earnings and competitive position of the registrant and its
subsidiaries.” In addition, disclosure is required for “material estimated capital expenditures for
environmental control facilities” for the current and following years, and any further period of
time deemed material. Similar requirements are in place for smaller reporting companies under
Item 101(h)(4)(xi).
2. Legal proceedings. Item 103 of Regulation S-K covers legal proceedings where the registrant,
a subsidiary, or the property of the registrant is a part of litigation. Instruction 5 to Item 103
gives guidance for the disclosure of environmental litigation. Environmental protection litigation
has to be disclosed if the litigation, whether an administrative or judicial proceeding, is material
to the business or its financial condition, the amount the registrant may be required to pay
exceeds 10% of current assets, or one of the parties is a governmental organization and the
proceedings may impose monetary sanctions, unless the registrant has the reasonable belief that
there will not be any monetary sanctions or the amount is less than $100,000.
3. Risk Factors. Item 503(c) of Regulation S-K requires the most important risk factors to be
clearly disclosed and the registrant must describe how each risk affects the registrant in
particular. A discussion of risks that could apply to any registrant or offering is not appropriate
for this section.
4. MD&A. Item 303 of Regulation S-K covers the MD&A discussion required of registrants.
The purpose is three-fold: (1) explain the financial statements through the eyes of management in
a narrative, (2) give a better overall financial disclosure and the context the financial information
should be analyzed in, and (3) give information regarding the quality and variability of earnings
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and cash flow so an investor may determine whether past performance is a sign of what to expect
in the future.
The rules for MD&A disclosure sometimes give specific guidance for how a registrant
must comply with the rule, but other times the requirements identify principles that must be
applied in the context of the registrant’s unique circumstances. One example is the requirement
to “[i]dentify any known trends or any known demands, commitments, events or uncertainties
that will result in or that are reasonably likely to result in the registrant's liquidity increasing or
decreasing in any material way.” Similar considerations must be made where trends might effect
capital resources or income from continuing operations. To determine whether a trend, demand,
commitment, event, or uncertainty must be disclosed, management must consider:
1. Is the known trend, demand, commitment, event or uncertainty likely to come
to fruition? [If not, no disclosure is required.]
2. If management cannot make that determination, it must evaluate objectively the
consequences of the known trend, demand, commitment, event or uncertainty, on
the assumption that it will come to fruition. [No disclosure if no material effect.]
5. Foreign private issuers. Foreign private issuers are generally governed by the disclosure
requirements in Form 20-F, not Regulation S-K. Most of the requirements under Regulation S-K
that may require climate change related disclosure have parallels in Form 20-F. For example,
Item 3.D requires a disclosure of material risks and Item 4.D requires a description of any
environmental issues that might effect utilization of assets.
D. Climate Change Related Disclosures
This section of the Guidance gives examples of how climate change may trigger
disclosure under the rules already discussed. Possible triggers include the impact of legislation
and regulation, international accords, indirect consequences of regulation or business trends, and
physical impacts of climate change. Each of these is discussed in turn.
The impact of legislation and regulation may trigger disclosure under several of the rules.
Under Item 101, laws relating to GHG emissions may trigger disclosure “of any material
estimated capital expenditures for environmental control facilities for the remainder of a
registrant’s current fiscal year and its succeeding fiscal year and for such further periods as the
registrant may deem material. Item 503(c) might require the disclosure of risks of existing or
potential climate change laws or regulations. Climate change legislation or regulation may
trigger disclosure under Item 303 if the legislation or regulation is reasonably likely to materially
effect the financial condition or results of operations of the registrant. As discussed earlier,
MD&A will be required unless the legislation is not reasonably likely to be enacted or will not
likely have any material effect.
International accords may also trigger disclosure. The changes to and obligations
brought about by international agreements may affect registrants in a similar manner as domestic
legislation or regulations could. For example, if the U.S. and China agreed to lower total GHG
emissions, certain goods may become more expensive in particular areas. This increase in the
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price of goods would be likely to have a material effect on the registrant, and any pending
agreement would be a risk if it was likely to come to fruition.
Indirect consequences of regulation or business trends create various risks or
opportunities for registrants by introducing various legal, political, technological and scientific
climate change developments. Demand for particular products and services may increase or
decrease. One potential negative indirect consequence may be lowered demand for goods with
high GHG emissions. Conversely, there may be an increased demand for goods with lower
emissions. These possibilities may trigger disclosure under MD&A or as risk factors. These
factors may even require disclosure under Item 101 for the business description. One final
interesting trigger for disclosure would be a potential risk factor of the impact climate change
may have on a registrant’s reputation.
Last, the physical impacts of climate change may require disclosure since they could have
an effect on operations and results. For example, if climate change brings a greater chance of
severe storms, insurance companies may experience changes to profitability or have increased
risk. Damage to manufacturing and distribution may also result, which could effect many
different types of companies.
III. Points for Discussion
Climate change disclosure requirements bring up many different issues for companies
and investors alike. This section brings up some practical concerns and likely benefits of climate
change disclosure, along with a discussion of the recent landscape surrounding international
climate change accords. Finally, two examples of recent 10-Ks are given to show if and how
companies have reacted to the Guidance.
A. Practical Effects
Overall, the Guidance gives a helpful overview of the various disclosure rules that
registrants will need to keep an eye on with respect to global climate change. Highlighting the
rules that may require disclosure takes some of the guesswork out of complying with the
securities laws, which can be an extremely complex and time consuming process. Since climate
scientists generally agree that climate change is occurring, the Guidance is an attempt to get
more and better information out to investors so they may make informed decisions.
However, the Guidance comes at a cost to registrants. As stated by the Guidance, the
intent of Guidance is not to create any new law, but just to explicate the law as it already stands.
Whatever the intended effect of the Guidance, the practical effect is that companies will be
expected to increase disclosure, regulators will increase their scrutiny of disclosure, other
regulatory bodies may incorporate similar disclosure requirements, and increased disclosure or a
lack of disclosure on climate change may give rise to a greater number of lawsuits. These effects
may be generally categorized as increased costs on registrants.
On the other hand, disclosure may encourage companies to plan for climate change
contingencies, and climate change may bring about opportunities that create positive disclosures.
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If a company must disclose the risks posed by climate change, the company will also be under
pressure to come up with ways to deal with those risks and minimize any potential harm. The
Guidance is also viewed by some investors as beneficial because disclosure related to climate
change may influence an investor’s assessment of future stability and sustainability. For many,
information regarding climate change risks is integral to knowing which companies will be
profitable in the future.
B. Are New International Accords Likely to Require Increased Disclosure?
Despite repeated efforts to create meaningful international accords curbing international
GHG emissions, there remains a great hurdle to get developed and developing nations to come to
an agreement. As climate change negotiations continue, the United States and China will play a
crucial role in accomplishing climate change goals. These two countries produce 40% of GHG
emissions on Earth. [cite to sources?]
One obvious problem is that a growing country, like China, will not want to hold back
GHG emissions because restraint may slow growth. It may seem unfair to a developing nation to
be deprived of the kind of growth the United States enjoyed before the effects of climate change
surfaced. Despite these perceived attitudes, China has expressed a willingness to curb GHG
emissions at the U.N. hosted Durban Climate Change Conference. Specifically, China called for
a legally binding agreement to curb GHG emissions after 2020 as long as the United States and
others agreed to start taking steps to curb emissions.
While there is this positive news, other countries have not been as willing. Canada,
Japan, and Russia are all expected to opposed an continuance of the Kyoto Protocol, and the
United State never ratified it. Although Japan had expected to attempt to cut emissions by 25%
by 2020, the country expected that a growing nuclear power industry would help achieve that
goal. After the 2011 nuclear plant crisis in Japan, many of the generators are not in operation,
and the cost of reducing emissions has Japan rethinking its plan. [afield?]
Although there have not been any concrete agreements reached, it is possible that an
agreement will be reached sometime in the next decade. Any agreement will likely be a
conservative one, and will impact companies accordingly. The potential for an international
accord remains a viable trigger for disclosure of climate change related information, both for
foreign and domestic registrants.
C. Recent 10-K Examples: Exxon and Ford
Examples of how companies have made climate change related disclosures are available
through the SEC’s EDGAR system. Here is an example of a climate change related disclosure
from Exxon’s 10-K for the ending December 31, 2010:
Climate change and greenhouse gas restrictions. Due to concern over the risk
of climate change, a number of countries have adopted, or are considering the
adoption of, regulatory frameworks to reduce greenhouse gas emissions. These
include adoption of cap and trade regimes, carbon taxes, restrictive permitting,
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increased efficiency standards, and incentives or mandates for renewable energy.
These requirements could make our products more expensive, lengthen project
implementation times, and reduce demand for hydrocarbons, as well as shifting
hydrocarbon demand toward relatively lower-carbon sources such as natural gas.
Current and pending greenhouse gas regulations may also increase our
compliance costs, such as for monitoring or sequestering emissions.
This provision is listed under the general heading of risk factors and under a subheading for
government and political factors. Risk factors are disclosed pursuant to Item 503(c) of
Regulation S-K and must state how the risk might effect the registrant in particular. Exxon states
various ill effects that may befall them in light of potential GHG emission regulations, but do not
go into too much detail about it. The provisions does seem to point out how the risk effects the
company in particular, but the consequences are fairly general and may apply to other registrants.
Ford Motor Company also has a reference to climate change in its 10-K for 2010. The
provision states that climate change and its impact is a cause of regulations and potential
regulation. Although Ford is trying to increase the fuel economy of their vehicles, “[t]here are
limits to [Ford’s] ability to achieve fuel economy improvements over a given time frame.”
Therefore, future regulations may have a “substantial adverse impact” on Ford’s financial
condition and results of operations. The MD&A section talks about sustainability under the
heading “Drive Green,” but does not explicitly talk about climate change in that section.
However, this does seem to be a strategy addressing potential impacts of climate change to the
auto industry. Both of these sections give investors the kind of information that the Guidance is
asking for. Like Exxon, Ford’s risk factor was specific, but not overly elaborate or descriptive.
[who does this help anyone? Does management have any metrics? Do investors know anything
new?
As these two examples illustrate, climate change disclosures are being included in
registrants’ SEC filings. Both Exxon and Ford included climate change as a risk factor for the
year ending December 31, 2008. After issuance of the Guidance, both Exxon and Ford changed
their approach to disclosure of risks associated with climate change. Before the Guidance,
Exxon had only one sentence citing climate change as a risk due to new laws and regulations.
After the guidance, a much larger provision was dedicated to climate change. Ford already had a
provision in place before the Guidance. While Ford’s 2008 10-K seemed slightly more specific
to Ford, the “adverse impact” language was only strengthened to “substantial adverse impact”
after the Guidance was released. While neither company gave overly specific or particular
provisions to climate change, both seemed to meet the bar the Guidance asks for.
IV. Conclusion
As long as people continue to see climate change as a real risk to the planet, companies
will be faced with increased risk of doing business and increased opportunity for products with
lower carbon footprints. The Guidance is an important step to having companies report more
climate change related information. [but in your two examples, nothing’s happened] Even if the
managers of a company do not think climate change is an issue, one cannot ignore the real shift
in public and government focus worldwide regarding climate change. These changes pose real
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risks and opportunities that investors must evaluate in determining whether a company is a
worthy investment.
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Other Sources
1. Edward F. Green, SEC Release Establishes Guidance on Climate Change Disclosure, The
Harvard Law School Forum on Corporate Governance and Financial Regulation, March 7, 2010,
http://blogs.law.harvard.edu/corpgov/2010/03/07/sec-release-establishes-guidance-on-climatechange-disclosure/.
2. Insecurity and Change Commission: Never mind Madoff, SEC gumshoes are on the climate
beat, Wall St. J., Jan. 29, 2010,
http://online.wsj.com/article/SB10001424052748704878904575031441340842392.html.
3. Jilian Mincer, SEC Requires More Climate Change Data, Wall St. J., Jan. 29, 2010,
http://blogs.wsj.com/financial-adviser/2010/01/29/sec-requires-more-climate-change-data/.
4. Kara Scannell & Siobhan Hughes, SEC Votes for Corporate Disclosure of Climate Change
Risk, Wall St. J., Jan. 27, 2010,
http://online.wsj.com/article/SB10001424052748703410004575029303322357276.html.
5. Mari Iwata, Japan Reconsiders Plan to Cut Carbon Emissions, Wall St. J., Oct. 19, 2011,
http://online.wsj.com/article/SB10001424052970204618704576640493862577426.html.
6. Patrick McGroarty, Chinese Overture Jolts Climate Talks, Wall St. J., Jan. 27, 2010,
http://online.wsj.com/article/SB10001424052970204903804577080223812409562.html.
7. SEC Issues Interpretive Guidance Regarding Climate Change Disclosure, Simpson Thacher
Memorandum, Feb. 8, 2010, http://www.stblaw.com/content/Publications/pub948.pdf.
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