On January 27, 2010 the U.S. Securities and Exchange Commission (SEC) approved guidelines requiring companies to consider and disclose the impact that business or legal development related to climate change may have on its business.  Federal securities laws and SEC regulations require companies to disclose material information or information that an investor should possess in order to decide whether to buy a company’s stock.  The interpretive guidance was issued in response to investors who said companies aren’t providing enough data on the potential risks to their profits and operations from environmental protection laws and climate change risks.  “I do not believe that public companies today are doing the best job they possibly can do with respect to their current mandated disclosures,” said SEC Commissioner Elisse Walter; the decision “is designed to improve the quality of disclosures filed by U.S. public companies for the benefit of investors.”  (As reported by Bloomberg.)

The SEC’s interpretive releases do not create new legal requirements nor modify existing ones, but are intended to provide clarity and enhance consistency for public companies and their investors.  In her speech revealing the guidance, SEC Chairman Mary Schapiro stated: “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.”

Schapiro continued, “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.”  The interpretive guidance highlights the following areas as examples of where climate change may trigger disclosure requirements:

1. Impact of Legislation and Regulation: When assessing potential disclosure obligations, a company should consider whether the impact of certain 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.
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.
3. 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.
4. Physical Impacts of Climate Change: Companies should also evaluate for disclosure purposes the actual and potential material impacts of environmental matters on their business, such as the potential for increased insurance claims in coastal regions as a result of rising sea levels.

In the official SEC press release, Chairman Schapiro stated:

We are not opining on whether the world’s climate is changing, at what pace it may be changing, or due to what causes.  Nothing that the Commission does today should be construed as weighing in on those topics….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.

The guidance was approved along party lines (3-2), with two Republicans, Kathleen Casey and Troy Paredes rejecting the proposal.  Bloomberg cited both as saying scientific claims that man-made emissions are contributing to global warming are “unsettled” and today’s move could swamp investors with unnecessary information.  “This guidance is premature at best,” Casey said. “This interpretive release is unnecessary.”  U.S. Representative Joe Bartin, a Texas Republican who has said he rejects the idea that humans are contributing to global warming, said the SEC has more important matters to deal with, and that he is “troubled by an undertaking which seems so transparently political and such a breathtaking waste of the commission’s resources.”

Yet Nancy Kopp, Maryland’s treasurer, lauded the guidance, telling reporters that the SEC took a significant step in clarifying the issues for corporate officers.  “All I know as an investor is that it is impacting my ability to make investment decisions and that we need information on material impacts and material opportunities.”  Abby Joseph Cohen, a senior investment strategist at Goldman Sachs Group Inc, said that while more companies are reporting climate-change data in public filings, the information isn’t in a standard form and is difficult to analyze.  “Sometimes there are numbers, but numbers are often not reported in the same way by different companies.”  

The interpretive release is expected to be posted on the SEC’s web site shortly.