This guest post on the SEC’s new interpretive guidance on disclosure of climate change risk is by Eric Jamison. This topic has not been on the radar for many people involved in water policy, but it is an important new legal development for many water-related businesses, including those involved in water infrastructure and delivery, energy production, and wastewater treatment.
Eric is a second year law student at Wayne State and has a background in business management. He has worked extensively on all aspects of energy law and emerging climate change law, with a focus on opportunities for business and economic development at the state and local levels. Eric played a key role in developing the proposed Property Assessed Clean Energy (PACE) Program for Michigan, which would give homeowners the funds to invest in renewable energy and energy efficiency projects. Eric recently wrote a national article on the new SEC guidance on disclosure of climate change risk, and was kind enough to write a short summary here.
On February 8, 2010 the U.S. Securities and Exchange Commission (“SEC”) published interpretative guidance in the Federal Registrar regarding the disclosure of corporate climate change risk. As interpretative guidance on existing disclosure rules, the guidance becomes immediately effective upon publication in the Federal Register which may impose disclosure obligations for companies filing their 10-K forms for the year ending 2009.
The guidance is not intended to create new legal requirements, but to clarify the disclosure requirements under the existing reporting infrastructure. There has been political backlash by some Republican Senators claiming that the SEC should focus on the core mission of protecting investors and maintaining fair markets instead of getting involved with climate change. In addition, 21 Republican Senators are claiming that the guidance is essentially a new rule and thus should be subject to the formal rule making process under the Administrative Procedures Act.
The interpretative guidance identified some areas that may trigger disclosure obligations:
- The 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.
- 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.
- Indirect consequences of regulation or business trends - Legal, technological, political and scientific developments regarding climate change may create new opportunities or risks for companies. For instance, a company may face decreased demand for goods that produce significant greenhouse gas emissions or increased demand for goods that result in lower emissions than competing products. As such, a company should consider, for disclosure purposes, the actual or potential indirect consequences it may face due to climate change related regulatory or business trends.
- Physical impacts of climate change - Companies should also evaluate for disclosure purposes the actual and potential material impacts of environmental matters on their business.
The potential triggers outlined by the SEC include very broad and ambiguous requirements. The amount of pending federal, regional, state and even international regulatory and legislative action is enormous. The political debates continue over how to best address the challenges of climate change. Adding to the complexity of the problem is the lack of clear federal action; many regional, state and even local programs have emerged to address emissions regulation, green building codes and disclosure of energy use in real estate transactional matters. The impact of legislation on business is a complex issue encompassing many layers of analysis based on operations under different regulatory schemes, the reach of the supply chain and a myriad of pending legislation from Congress, agency actions and executive branch efforts.
Businesses may be better equipped to handle the indirect consequences. Sustainability initiatives have been at the forefront for many businesses for a number or years and during tight economic times businesses naturally look for ways to trim costs and operate more efficiently. Innovative businesses are accustomed to dealing with market uncertainty related to other market drivers, thus assimilating the risks from the climate should be within the ambit of corporations abilities.
The physical effects of climate change present special challenges to businesses. The best scientists in the world have struggled with forecasting the effects of climate change. It leaves corporations in a precarious position to try to evaluate and disclose potential impacts of climate change on their business. For many it is clear that the climate is changing, but the impacts of the change are multifaceted and result in non-linear changes.
In addition to the above mentioned challenges, many corporations participate in voluntary carbon reporting programs, which may be broader or narrower than the scope of the SEC disclosure obligations. Thus corporations must be cognizant of the voluntary climate related disclosures they make to ensure that they are uniform so as to not subject the company to potential liability for disclosure omissions or misstatements.
Despite the challenges posed by the new guidance, it moves the market towards transparency. One of the purposes of the disclosure rules is to facilitate investor understanding of the risks faced by corporations. Securities regulations require the disclosure of material information or information that a reasonable investor would find important. In light of the numerous initiatives related to climate change, it is implausible to think that investors of companies with significant impacts on the environment would find the disclosure of climate change related information immaterial. Major energy companies are facing fierce opposition from public interest groups for coal plant permitting, plaintiffs groups have successfully brought litigation regarding climate change liability, and emissions regulation is emerging from numerous sources. A reasonable investor may find much of this information to be material as they consider their investment strategy.
Putting aside the controversies regarding climate change, there has been significant activity from the public and private sector suggesting that corporations need to examine their operations and business model to reduce their environmental risks and liabilities. From a pragmatic standpoint emissions and resources cost corporations money, and by measuring and reporting such activities corporations will become acutely aware of their relative costs. Knowledge of costs will spur market innovation to reduce the use of resources and find ways to cut emissions because of the cost and uncertainty related to them.
