by Jerry J. Burgdoerfer, Gabrielle Sigel, William L. Tolbert, Jr., Elaine
Wolff, Lee E. Dionne
At an open meeting held January 27, 2010, the Securities and Exchange
Commission voted to issue an interpretive release (the “Release”) to provide
guidance on existing climate change disclosure obligations.[1]
Specifically, the Commission’s discussion identified four categories
of information about climate change that companies should consider
disclosing:
·
the impact of legislation and regulation;
·
the impact of international accords;
·
the indirect consequences of regulation or business trends; and
·
the physical impacts of climate change.
Although it does not create new legal requirements nor modify existing ones,
the Commission’s decision to issue the Release, passed by a three-to-two
margin, generated significant debate about the effects of the Commission’s
action on the prevailing standard of materiality, the political neutrality of
the SEC, industry compliance costs, and improving disclosure to investors.
This Jenner & Block Client Alert will discuss: A) the SEC’s stated
objectives; B) the effect of the Release on the standard of materiality; C) the
categories of disclosure identified in the Release; and D) the views of the
dissenting commissioners.
The full text of the Release is not yet available.
A. SEC Objectives
The SEC seeks to clarify the disclosure requirements that already apply to
reporting companies in order to enhance the level of current disclosure and the
consistency of disclosures. The Commission’s vote reflects
the view that companies need help in determining their disclosure
obligations in light of the changing legislative and regulatory landscape
relating to climate change. Current disclosure rules affect a company’s
disclosures relating to risk factors, business description, legal proceedings,
and management’s discussion and analysis.[2]
The fact that many public companies provide disclosure about significant
climate change matters outside of their SEC filings led Commissioner Walter to
conclude that public companies are not doing the best job they possibly can
with respect to their currently mandated disclosures, even though all of the
information disclosed elsewhere is not required to be disclosed under SEC
rules. However, Commissioner Walter stressed that in issuing the Release,
the Commission was not responding to the requests, both formal and informal,
that it received from the public concerning climate change and environmental
disclosure.
B. Definition of Materiality Unchanged
The Commission’s discussion indicates that the Release is not intended to
affect existing rules concerning company reporting obligations nor is it
intended to affect existing tests of materiality for determining whether
disclosure is required. Although the Commission categorizes the climate
change matters that management should consider disclosing, this is not
meant to change the standard of materiality for determining whether disclosure
is required that was articulated by the U.S. Supreme Court in TSC Industries
v. Northway.[3]
In TSC Industries, the Supreme Court stated that an omitted fact
is material if there is a substantial likelihood that a reasonable shareholder
would consider it important or it would have “significantly altered the total
mix of information made available.”[4]
Further, the Commission asserts that the Release will not impose any
specific disclosure requirements. For example, as Commissioner Walter
points out, it does not require companies to disclose their carbon footprints
or what they are doing to reduce greenhouse gas (“GHG”) emissions.
Therefore, information pertaining to the categories enumerated below
should be evaluated for materiality under the current standard.
C. Categories of Information Identified
The commissioners discuss four categories of information that reporting
companies should take into account when deciding whether to include information
in Management’s Discussion and Analysis of Financial Condition and Results of
Operations (“MD&A”):
1) Impact of Legislation and Regulation. When assessing
potential disclosure obligations, a company should consider whether the impact
of certain existing laws and regulations regarding climate change is material.
In certain circumstances, a company should also evaluate the potential
impact of pending legislation and regulation related to this topic. Management
should evaluate the impact of present and pending legislation and regulation on
such factors as liquidity, cash flow, and operations. For example, the
likelihood of “cap-and-trade” legislation may be a relevant factor for
companies that emit GHGs. Similarly, U.S. EPA’s new GHG reporting rule or its
proposed rule regarding permitting for stationary sources of GHG emissions may
be appropriate to evaluate.[5]
In order to properly evaluate the pressure any such legislation or
regulation might exert on a company’s position, it may be necessary to disclose
the amount of GHG emissions and/or systems the company has in place for
collecting emissions data.
2) Impact of International Accords. A company should consider,
and disclose when material, the risks or effects on its business of
international accords and treaties relating to climate change. Companies
should consider any international treaties or protocols that may develop and
any resulting risks or effects on its business. Commissioner Aguilar
cites international developments and the expectations that accompanied the
recent United Nations Framework Convention on Climate Change in Copenhagen as evidence
that the effects of international efforts to ameliorate climate change may be
material to investors. Notably, while the Copenhagen
conference did the not result in a legally binding international agreement, the
resulting Copenhagen Accord expects that developed countries will make
commitments for future GHG reduction efforts.
3) Indirect Consequences of Regulation or Business Trends.
Companies should consider legal, technological, political and scientific
developments regarding climate change that may create new opportunities or
risks for companies. For example, new legislation and regulation could
cause a shift in consumer demand for products that “create or reduce greenhouse
gas emissions.” The Commission counts reputational harm as potentially
material information, observing that the public’s perception of a company’s
practices with respect to GHGs may affect business operations and financial
condition. Similarly, any environmental litigation that affects an entity’s
reputation may also be material.[6]
4) Physical Impacts of Climate Change. Management must also
disclose material information about the physical consequences of climate
change. Examples of physical consequences include disruptions caused by
varying sea levels, changing weather patterns, and the availability and quality
of water. These phenomena may disrupt a company’s supply lines, affect
the cost of and access to certain resources, and could result in damage to
property and equipment.
D. Concerns of Dissenting Commissioners
The dissenting commissioners, Commissioners Casey and Parades, argue that
the issuance of the Release reflects an inappropriate policy perspective and
does, in fact, introduce substantive changes to the law. They fear that
the SEC has “taken sides” in the policy debate about climate change and that
reporting companies and investors will pay the price in terms of additional
compliance costs and an inundation of information of questionable value.
Commissioner Paredes views the requirement that public companies consider
the possibility of potential legislation and international treaties as so
speculative that the Release in effect will change the standard of
materiality, noting that the Supreme Court in TSC Industries
rejected a definition of materiality that included information that “might” be
relevant. In addition, the dissenting commissioners believe that the
Release is unnecessary in light of their view that no evidence of systemic
deficiencies with respect to environmental disclosures exists.
[1] SEC Open Meeting webcast for Wednesday,
January 27, 2010, available at http://www.sec.gov/news/openmeetings.shtml.
[2] See Items 101, 103, 303 and 503(c) of
Regulation S-K of the Securities Act of 1933, as amended.
[3] 426 U.S.
438 (1976).
[5] See Mandatory Reporting of Greenhouse
Gases, 74 Fed. Reg. 56,260 (final rule Oct. 30, 2009); Prevention of
Significant Deterioration and Title V Greenhouse Gas Tailoring Rule, 74 Fed.
Reg. 55,292 (proposed Oct. 27, 2009). For further discussion of these GHG
regulatory initiatives see Jenner & Block Client Advisories U.S.
EPA Requires Mandatory Reporting Beginning with Next Year’s Greenhouse Gas
Emissions, Sept. 23, 2009, EPA
Proposes Rule For Applying Clean Air Act Permit Requirements to GHG Stationary
Sources, October 6, 2009; See generally "Climate
Change 2009 Year in Review: Building Foundations for Change or Just Castles in
the Sand?" Emerging Issues Analysis, LexisNexis, January 2010.
[6] Notably, on September 21, 2009, the U.S.
Court of Appeals for the Second Circuit held that eight states, New York City, and three land trusts could bring public
nuisance claims against owners of some of the largest U.S. electric
power plans, alleging that the plants’ GHG emissions contribute to global
warming. Connecticut v. American Electric Power Co., 582 F.3d
309 (2nd Cir. 2009). Consistent with the decision of the Second Circuit,
on October 16, 2009, the United States Court of Appeals for the Fifth Circuit
declined to dismiss claims brought by a class of Mississippi landowners that
certain corporations’ GHG emissions constitute a private and public nuisance
under Mississippi law, holding that plaintiffs have standing to sue and that
the case does not pose a non-justiciable political question. Comer v. Murphy Oil USA, 585 F.3d 855 (5th
Cir. 2009). See also
Jenner & Block Client Advisory,
Federal Appellate Court Allows Public Nuisance Claims for Greenhouse Gas
Emissions, September 25, 2009.