Commission Approves Climate Disclosure Guidance

On January 27, 2010, the Securities and Exchange Commission ("SEC") approved, by a slight majority, the issuance of guidance on how existing public company-disclosure requirements may apply to climate change. A pre-publication copy of the guidance was made available on February 2, 2010 (see below). Unlike a law or rule promulgated pursuant to legal authority, the interpretive guidance is not legally binding. It is, nonetheless, significant as the SEC's first express statement regarding how climate change issues may implicate companies' disclosure requirements.

Existing disclosure rules cover a company's risk factors, business description, legal proceedings, and management discussion and analysis. Companies must disclose to investors material information that may impact their business. Materiality is generally determined by reference to the "reasonable investor." The SEC has long acknowledged that environmental factors may trigger disclosure duties under certain circumstances. The issue of climate change was not specifically considered until 2007.

In September 2007, environmental and investor groups filed petitions requesting that the SEC address how climate change may raise disclosure obligations. The petitioners questioned whether duties could be triggered once companies considered whether and how climate change may physically impact their business operations and whether and how climate change will be regulated. For example, insurance companies may be impacted by climate change if the future sees more variable and extreme weather events. Other risks and opportunities involve those related to companies' products or services and litigation involving greenhouse gas-emitters.

The SEC's interpretive guidance indicates that climate change may trigger existing disclosure requirements for some companies. In assessing whether disclosure is required, companies should consider the following:

• existing domestic laws and regulations relating to climate change, including the potential impact of pending laws and rules;
• opportunities and risks arising from legal or technological aspects of climate change, including indirect impacts of regulation like decreased demand for carbon-intensive products;
• potential positive and negative effects of international legal instruments governing climate change; and
• actual and potential physical impacts of climate change on business operations.

Thus, under the SEC's guidance, a company may have to consider the materiality and possible disclosure of impacts related to the Environmental Protection Agency's mandatory greenhouse gas reporting rule, promulgated in 2009, as well as other pending Clean Air Act rulemakings on greenhouse gases. Companies may also have to consider the likelihood of enactment and impacts of comprehensive climate change legislation. In addition, companies may have to disclose risks related to the rise in private tort litigation involving greenhouse gas emitters. Finally, if international negotiations lead to a post-Kyoto Protocol climate treaty, companies may have to consider how the treaty would impact their businesses.

Publication in the Federal Register is expected soon.