SEC Guidance on Disclosure Related to Climate Change: Overview, Analysis and Consequences for Public Companies
Fornaro, James M., Journal of Accountancy
* The SEC in February 2010 issued an interpretive release, Commission Guidance Regarding Disclosure Related to Climate Change. While the release contained guidance rather than new disclosure obligations or rule amendments, it is significant for public companies attempting to meet existing requirements and for all CPAs to be aware of as legislative and regulatory developments continue to unfold in this area.
* The release applies to 10-K reports and certain other SEC filings made after its Feb. 8, 2010, effective date. It could impact four disclosure areas: description of business; legal proceedings; MD&A; and risk factors.
* Risks that could trigger a disclosure obligation include: the impact of legislation and regulation; international environmental accords; indirect consequences of regulation or business trends; and physical effects of climate change.
In February 2010, the SEC issued an interpretive release titled Commission Guidance Regarding Disclosure Related to climate Change (Release Nos. 33-9106; 34-61469; FR-82) that provides guidance concerning disclosures related to the impact of climate change and related legislative and regulatory developments. The release provides assistance to public companies in satisfying existing disclosure responsibilities under federal securities laws. It does not, however, establish new disclosure obligations or amend existing rules.
The release is significant in that it forces management to examine the issue of climate change and assess the impact on their businesses--perhaps for the first time. The SEC has promised follow-up actions on the topic, and additional rules may be forthcoming. CPAs need to be aware of the underlying business risks associated with climate change, be mindful of evolving legislative and regulatory developments, and monitor future SEC actions in this area.
This article provides an overview of existing SEC disclosure requirements in "Regulation S-K" that are impacted by the release, and a discussion of particular risks that companies face from climate change legislation and regulatory developments (both domestic and international) that may trigger a disclosure obligation. Other company risks identified by the SEC, including the physical impacts and other "indirect consequences" from climate change, are also presented.
DISCLOSURES IN SEC FILINGS IMPACTED BY THE RELEASE
The release was effective Feb. 8, 2010, making it applicable to 10-K reports and pertinent SEC filings made after that date. This article includes sample disclosures from 10-K reports filed after the effective date to illustrate how registrants have responded to the new guidance.
The SEC's uniform disclosure system includes requirements pertaining to non-financial statement disclosures in "Regulation S-K," which is required in registration statements filed under the Securities Act of 1933 and in annual or other periodic reports filed under the Securities Exchange Act of 1934. (Foreign private issuers follow rules set forth in Form 20-F and other forms.) The release may impact four particular items within the disclosure requirements under Regulation S-K:
1. Item 101: Description of business. This item requires the registrant to provide a discussion about the historical development of the business, a narrative description of its business activities, and financial information about reportable segments. Discussion matters include principal products and services, markets, sources and availability of raw materials, competitive conditions, and other issues. Item 101 also requires two types of disclosures related to an entity's compliance with environmental regulations. One pertains to "the material effects that compliance with Federal, State and local [environmental] provisions which have been enacted or adopted regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, may have upon the capital expenditures, earnings and competitive position of the registrant and its subsidiaries. …