The Securities and Exchange Commission has decided to add climate change to the already long list of risks companies must disclose to investors, after a prickly hearing and sharp disagreement among the commissioners about whether such disclosure is really practical.
The Commission voted 3-2 to publish interpretive guidance on what it expects public companies to disclose in Form 10-K about climate change risks, with Chairman Mary Schapiro and her two fellow Democratic appointees in favor and the two Republican nominees opposed. The agency has not yet published a text of the guidance, nor is it clear when the guidance will be published. But as an interpretive release rather than a formal rule, securities experts are assuming it will go into effect immediately—so companies drafting their Management Discussion & Analysis reports for the 10-K should plan accordingly.
The guidance will direct companies to consider the potential implications of climate change from two perspectives: whether a changing climate itself might affect the filer’s business or operations; and how rules and laws pertaining to climate change or environmental protection (including international treaties) might affect the business or expose it to new litigation risks.
Schapiro
Schapiro stressed that the SEC is “not opining on whether the world’s climate is changing, at what pace it might be changing, or due to what causes.” Rather, she said, the guidance is intended to “provide clarity and enhance consistency” to help companies decide what does or does not need to be disclosed. She also said the new disclosures will still fall within the Commission’s usual expectations for companies’ reporting obligations and for materiality.
“These rules and interpretations have served investors well for decades and provide both the framework and flexibility necessary to apply to changing facts and circumstances,” she said.
Casey
Her Republican colleagues did not see it that way. Commissioner Kathleen Casey accused the SEC of trying to please the “social environmental policy lobby,” and challenged the underlying premise that climate change is indeed a threat that needs attention. “The issuance of this release at a time when the state of science, law, and policy relating to climate change appear to be increasingly in flux makes little sense,” she said.
“We’re glad the SEC is stepping up to the plate to protect investors.”
—Anne Stausboll,
CEO,
CalPERS
Casey added that she believes sufficient information about environmental threats is available to investors already. “In truth, our disclosure regime related to environmental issues, including climate change, is highly developed and robust,” she said. To pile on still more regulatory obligations amid recession and financial crisis “sends a curious signal to the investment community about what we view as the most pressing issues facing the Commission.”
Paredes
Commissioner Troy Paredes expressed all the same concerns as Casey. “Now is not the time to support climate change disclosure,” he concluded. Republicans in Congress also panned the move, although it is too early to tell whether they might try to slip amending legislation into the financial regulatory overhaul currently under debate.
Schapiro, Elisse Walter, and Luis Aguilar, however, all spoke strongly in support of the measure. Aguilar—who has emerged as something of a stalking horse for SEC policy moves under the Obama Administration—further noted that the guidance is only a “first step in where the Commission will begin to play a more proactive role.”
Moving Forward
Mack
In truth, the filing community has expected a requirement on climate change disclosure for quite a while. Eulalia Mack of the law firm Reed Smith says the real surprise would have been formal rule-making, or a requirement for specific discussions about climate change in the same way the SEC requires specifics about other environmental matters. Last week’s vote, Mack says, is “very much in line with what practitioners have been suggesting and expecting for several years now.”
SCHAPIRO ON CLIMATE CHANGE
The following excerpt is from Mary Schapiro’s speech on the issue of climate change:
An interpretive release, as this is known, does not create new legal requirements or modify existing ones—it is merely intended to provide clarity and enhance consistency.
To that end, 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.
The Commission is also not considering amending well-defined rules concerning public company reporting obligations, nor redefining long-standing interpretations of materiality. These rules and interpretations have served investors well for decades, and provide both the framework and flexibility necessary to apply to changing facts and circumstances. If something has a material impact on a company then it is something that needs to be disclosed—that has always been the case.
What the Commission is considering is whether to provide guidance that can help public companies in determining what does and does not need to be disclosed.
The discussions, debates, and decisions that are taking place in the U.S. and elsewhere on this topic have implications under our existing, long-standing disclosure rules.
It is neither surprising nor especially remarkable for us to conclude that of course a company must consider whether potential legislation—whether that legislation concerns climate change or new licensing requirements—is likely to occur. If so, then under our traditional framework the company must then evaluate the impact it would have on the company’s liquidity, capital resources, or results of operations, and disclose to shareholders when that potential impact will be material. Similarly, a company must disclose the significant risks that it faces, whether those risks are due to increased competition or severe weather. These principles of materiality form the bedrock of our disclosure framework.
Today’s guidance will help to ensure that our disclosure rules are consistently applied, regardless of the political sensitivity of the issue at hand, so that investors get reliable information.
Source
Mary Schapiro’s Speech on Climate Disclosure (Jan. 27, 2010).
Numerous investor groups, who have long pushed the SEC to issue guidance requiring companies to assess and disclose the risks they face from climate change, hailed the Commission’s action as a major victory. In a joint release, Boston-based Ceres, its Investor Network on Climate Risk, and the Environmental Defense Fund, called the guidance “the world’s first economy-wide climate risk disclosure requirement.”
“The lack of specific guidance until now has resulted in weak and inconsistent climate-related disclosure by public companies,” the release said.
The mighty California Public Employees Retirement System, with its $205 billion in assets, also hailed the vote. “Ensuring that investors are getting timely, material information on climate-related impacts, including regulatory and physical impacts, is absolutely essential. Investors have a fundamental right to know which companies are well positioned for the future and which are not.”
Pavlovsky
The guidance will mean some changes for companies. Many businesses already provide some disclosures related to climate change to the public, through responses to the Carbon Disclosure Project, investor inquiries, and vehicles such as corporate sustainability reports. While it does not amend the rules on disclosure, the SEC’s action could affect the application of the existing rules by providing focused guidance regarding climate change. Companies should take care to ensure that their processes and structure are represented consistently throughout these various channels and should consider the SEC’s new guidance and prior disclosures to shareholders as they prepare their form 10-Ks, says Kathryn Pavlovsky, co-leader of Deloitte’s sustainability group.
“The stakes become higher whenever information is included in public regulatory filings,” says Kathy Nieland, a partner in the sustainability practice at PricewaterhouseCoopers. “Companies need to evaluate their enterprise-wide systems and ensure that processes are in place to maintain and report upon significant climate change-related risks, challenges, and information.”
Pavlovsky says companies should take the SEC’s instruction as an opportunity to review the adequacy of their controls “in terms of identifying, measuring, reporting and disclosing on climate change-related risks.” A particular challenge, she warns, will be achieving a consensus on how to assess climate-related risks, given the degree of legal and regulatory uncertainty as well as the financial uncertainly that comes with any new regulatory framework.
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