The New Environment for Climate Change Disclosures

By Fried, Abraham N.; Holtzman, Mark P. et al. | The CPA Journal, December 2012 | Go to article overview

The New Environment for Climate Change Disclosures


Fried, Abraham N., Holtzman, Mark P., Duan, Li, The CPA Journal


Scientists and policymakers have issued dire predictions about the potential effects of climate change, including rising sea levels, increased energy and transportation costs, and more frequent natural disasters. Such concerns could lead to increased regulation and higher costs for businesses.

Recent SEC interpretive guidance emphasized the importance of disclosing the likely impact of climate change. Regulation S-K requires public companies to provide a description of business, pending legal proceedings, and risk factors related to climate change issues. Furthermore, companies must estimate and disclose the possible direct and indirect costs of climate change.

The discussion below analyzes the SFX! guidance and its requirements related to climate change disclosures, reviews companies' disclosures from SEC filings, and offers statistics about the disclosure practices of numerous companies. In light of the recent SEC guidance, public companies and their advisors should strive to understand common reporting practices related to climate change.

Overview of the Guidance

On January 27, 2010, the SEC released interpretive guidance related to climate change disclosures (Releases 33-9106, 34-61469, and FR-82, http://www.sec.gov/ rules/interp/2010/33-9106.pdf). It does not require any new disclosures; it reminds preparers of financial statements about their obligations under existing reporting requirements. Disclosures related to climate change are required under Regulation S-K, and they affect the following areas: description of business (Item 101), pending legal proceedings (Item 103), risk factors associated with the company (Item 503[c]), and management's discussion and analysis (MD&A, Item 303). The following sections examine each of these disclosures in further detail.

Description of business. Item 101 requires a registrant to describe its business and the business of all of its divisions and segments; this description should include a discussion of the entity's products and services, its primary customers, and its competitive environment. The SEC guidance reminds companies that Item 101(c)(l)(xii) requires disclosure of any material effects of compliance with provisions relating to the protection of the environment Companies should disclose material estimates of future capital expenditures related to compliance, regardless of whether they would be incurred in the current fiscal year or future periods.

Pending legal proceedings. Item 103 requires the disclosure of all pending material legal proceedings involving the business or any of its subsidiaries, including any potential legal action arising from environmental regulation. (The guidance specifically points out that instruction 5 of Item 103 requires the inclusion and description of any proceedings that would result from regulations or provisions enacted to protect the environment) The existing framework requires these disclosures to include potential material costs, such as future capital expenditures related to compliance or potential settlement of future damage claims.

MD&A. This item requires businesses to provide a more general discussion in the MD&A of the effects of potential future environmental factors; it asks companies to disclose known trends or uncertainties that are reasonably likely to materially affect the entity's financial condition. These disclosures are not restricted to any specific future time period; instead, the time period covered depends upon the business or the nature of the event being considered. Registrants should discuss and disclose the potential impact of climate change, as well as legislation designed to mitigate its effect on the environment.

Risk factors associated with the company. Item 503(c) requires an entity to discuss current and future potential risks. This discussion should describe how potential risks specifically impact the business and increase the risk associated to investors. …

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The New Environment for Climate Change Disclosures
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