Details and Excerpts from the SEC’s Climate Risk Disclosure Interpretive Guidance

As we previously reported, the SEC issued their interpretive guidance concerning the need for publicly-traded companies to identify, assess and (if necessary) report climate-related business risks within existing SEC reports.  This interpretive guidance document was published in the Federal Register of February 8, 2010.

Elm has reviewed this publication and provides the following excerpts that we feel may be most critical to companies who are looking to address the requirements of the new Interpretive Guidance.    These excerpts may be slightly edited for length and clarity, but we have attempted to ensure that substantive information remains as in the publication.

The Commission has not quantified … a specific future time period that must be considered in assessing the impact of a known trend, event or uncertainty that is reasonably likely to occur. As with any other judgment required by Item 303, the necessary time period will depend on a registrant’s particular circumstances and the particular trend, event or uncertainty under consideration.

[Management] should not limit the information that management considers in making its determinations. Improvements in technology and communications in the last two decades have significantly increased the amount of financial and non-financial information that management has and should evaluate, as well as the speed with which management receives and is able to use information. While this should not necessarily result in increased MD&A disclosure, it does provide more information that may need to be considered in drafting MD&A disclosure. In identifying, discussing and analyzing known material trends and uncertainties, registrants are expected to consider all relevant information even if that information is not required to be disclosed, and, as with any other disclosure judgments, they should consider whether they have sufficient disclosure controls and procedures to process this information.

If management cannot make a determination concerning the known trend, demand, commitment, event or uncertainty likely to come to fruition, it must evaluate objectively the consequences of the known trend, demand, commitment, event or uncertainty, on the assumption that it will come to fruition. Disclosure is then required unless management determines that a material effect on the registrant’s financial condition or results of operations is not reasonably likely to occur.’’  Identifying and assessing known material trends and uncertainties generally will require registrants to consider a substantial amount of financial and non-financial information available to them, including information that itself may not be required to be disclosed.

Registrants should consider specific risks they face as a result of climate change legislation or regulation and avoid generic risk factor disclosure that could apply to any company.

Management must determine whether legislation or regulation, if enacted, is reasonably likely to have a material effect on the registrant, its financial condition or results of operations.

Examples of possible consequences of pending legislation and regulation related to climate change include:

  • Costs to purchase, or profits from sales of, allowances or credits under a ‘‘cap and trade’’ system;
  • Costs required to improve facilities and equipment to reduce emissions in order to comply with regulatory limits or to mitigate the financial consequences of a ‘‘cap and trade’’ regime; and
  • Changes to profit or loss arising from increased or decreased demand for goods and services produced by the registrant arising directly from legislation or regulation, and indirectly from changes in costs of goods sold.

We reiterate that climate change regulation is a rapidly developing area.  Registrants need to regularly assess their potential disclosure obligations given new developments.

Registrants also should consider, and disclose when material, the impact on their business of treaties or international accords relating to climate change.

Depending on the nature of a registrant’s business and its sensitivity to public opinion, a registrant may have to consider whether the public’s perception of any publicly available data relating to its greenhouse gas emissions could expose it to potential adverse consequences to its business operations or financial condition resulting from reputational damage.

Significant physical effects of climate change, such as effects on the severity of weather (for example, floods or hurricanes), sea levels, the arability of farmland, and water availability and quality.

Possible consequences of severe weather could include:

  • For registrants with operations concentrated on coastlines, property damage and disruptions to operations, including manufacturing operations or the transport of manufactured products;
  • Indirect financial and operational impacts from disruptions to the operations of major customers or suppliers from severe weather, such as hurricanes or floods;

Clearly, SEC’s position is that such a risk identification and assessment framework be robust and extend far beyond a technical environmental scope.

These excerpts are presented for convenience and informational purposes only and should not be solely relied on in developing appropriate information/response to the SEC requirements.  Qualified expertise should be engaged to properly meet these requirements.

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