February 4, 2010
At a meeting held on January 27, 2010, the Securities and Exchange Commission ("SEC") approved by a 3-2 vote an interpretive release (the "Interpretive Release") providing guidance to public companies on the SEC’s existing disclosure requirements as they apply to climate change matters. The Interpretive Release makes clear that companies who have not done so should establish a process for assessing whether and to what extent climate change matters are material to the company and, if so, include appropriate disclosures in their SEC filings. This is especially critical for calendar-year companies who will be filing their Annual Reports on Form 10-K in the coming weeks. The Interpretive Release is available at http://www.sec.gov./rules/interp/2010/33-9106.pdf.
The SEC approved the Interpretive Release by a 3-2 vote with Commissioners Kathleen Casey and Troy Paredes dissenting. The Commissioners disagreed on whether the Interpretive Release meant that the SEC was taking a position on climate change. Several Commissioners and the SEC staff emphasized that the Interpretive Release only clarifies existing disclosure obligations and does not alter those obligations or change longstanding interpretations of materiality. However, Commissioner Parades warned that the Interpretive Release may result in additional disclosures that are unlikely to improve investor decision making. A summary of the Interpretive Release, which the SEC published earlier this week, is set forth below.
The Interpretive Release states that it is intended to clarify that existing SEC disclosure rules may require public companies to describe climate change matters, including (under Regulation S-K): Item 101 (Description of Business); Item 103 (Legal Proceedings); Item 303 (Management’s Discussion of Financial Condition and Results of Operations (MD&A)); and Item 503(c) (Risk Factors). It then discusses four topics that may trigger climate change disclosure under these rules.
1. The impact of climate change legislation and regulation. The Interpretive Release states that companies should consider the impact of both existing legislation and regulation and, in some circumstances, pending legislation and regulation related to climate change. Possible disclosures include:
The Interpretive Release also includes other examples of possible consequences of pending legislation and regulation related to climate change that may need to be disclosed, including costs and profits related to implementation of a "cap and trade" system and changes to profit or loss related to increased or decreased demand for goods and services produced by the company.
2. The impact of international climate change accords. The Interpretive Release notes that, even though the United States has not signed the Kyoto Protocol, some companies operate in signatory countries. Moreover, the Interpretative Release indicates that the European Union is active with respect to climate change matters. Similar to the disclosures discussed above regarding the impact of legislation and regulation, the Interpretive Release advises companies to consider, and disclose under existing SEC rules where material, the impact of international accords relating to climate change.
3. Indirect consequences of climate change regulation or business trends. The Interpretive Release indicates that companies should consider actual and potential indirect consequences of climate change-related regulation and business trends. For example, the Interpretive Release suggests that companies may find it important to discuss in the description of business, MD&A and/or risk factors any actual or expected:
4. The physical impacts of climate change. The Interpretive Release also states that companies should consider actual or potential impacts of the physical effects of climate change on their business. For example, the Interpretive Release suggests that companies may find it important to disclose actual or expected physical impacts of climate change such as:
In light of the Interpretive Release, public companies (particularly those in industries most affected by climate change matters) should:
1. As part of the company’s disclosure controls and procedures, review the existing process or establish a process for assessing the materiality of climate change matters to the company and determine what (if any) disclosures should be included in their SEC filings with respect to climate change matters. The process should include discussions among the company’s securities law counsel, environment/safety/health as well as government relations personnel and members of the company’s disclosure committee.
2. Assess the company’s other public climate change disclosures (e.g., state- and EPA-mandated disclosures, voluntary disclosures in sustainability reports and to third-party organizations like the Carbon Disclosure Project, and disclosures on websites or in investor presentations). The Interpretive Release indicates that, although certain of this reporting is voluntary, some of this information may be required to be disclosed in SEC filings under existing disclosure requirements.
3. Monitor legislative and regulatory developments on greenhouse gas and climate change matters at the international, Federal, state and regional levels, and assess the potential impact of such developments on the company’s business.
Finally, companies should remain mindful that the SEC will continue to assess public company disclosures relating to climate change matters. The Interpretive Release indicates that the SEC’s Investor Advisory Committee is considering such issues as part of its broader mandate to provide advice and recommendations to the SEC. The Interpretive Release also states that the SEC plans to hold a public roundtable on climate change disclosure this Spring and that further guidance or rulemaking relating to climate change disclosure is possible in the future.
 See our client alert issued on September 22, 2008 for more information on other developments regarding disclosure of climate change matters in SEC filings.
 SEC Chairman Mary Schapiro stated, "the Commission is not making any kind of statement regarding the facts as they relate to the topic of ‘climate change’ or ‘global warming.’ And, we are not opining on whether the world’s climate is changing; at what pace it might be changing; or due to what causes. Nothing that the Commission does today should be construed as weighing in on those topics." However, Commission Casey noted, "I can only conclude that 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 our expertise and beyond our fundamental mission of investor protection."
 Commissioner Paredes stated, "it is worth recalling that, in rejecting the view that a fact is ‘material’ if an investor ‘might’ find it important, Justice Marshall, writing for the Supreme Court in TSC Industries, warned that ‘management’s fear of exposing itself to substantial liability may cause it simply to bury the shareholders in an avalanche of trivial information — a result that is hardly conducive to informed decisionmaking.’"
 For example, there are two bills pending in Congress that would establish a "cap-and-trade" mechanism for controlling greenhouse gas emissions, The Clean Energy Jobs and American Power Act of 2009 (S. 1733) and The American Clean Energy and Security Act of 2009 (H.R. 2454). Additionally, the U.S. Environmental Protection Agency ("EPA") has proposed to regulate greenhouse gas emissions from both mobile and stationary sources.
 For periodic updates concerning legal developments in climate change and greenhouse gas matters, see our Environmental News: Climate Change newsletter.
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