SEC May Change Risk Disclosures for EHS

Previously, Elm Sustainability Partners published an article on the sustainability aspect of the Securities and Exchange Commission’s Concept Release on Disclosure Modernization. But other parts of the Release may significantly impact on environmental, health and safety (EHS) matters as well.

The SEC posed numerous questions and requests for comment on the risk factor disclosures in 10-K and 10-Q. Currently, risk factor disclosures must meet certain standards related to format, location in the report and the use of plain language. There are circumstances where EHSS risks become subject to 10-K and 10-Q disclosure.  These include environmental cleanup/remediation liabilities and costs associated with long-term employee exposure to substances (e.g., asbestos). In the Release, the SEC pointed out that

… registrants should avoid “boiler plate” risk factors, and that a discussion of risk in purely generic terms does not indicate how a risk may affect an investment in a particular registrant… Registrants often use risk factors that are similar to those used by others in their industry or circumstances as the starting point for risk disclosure, and the disclosure is not always tailored to each registrant’s particular risk profile…

In seeking more specific risk factor disclosures, the SEC sought comment on various points, including:

  • Whether each risk factor be accompanied by a specific discussion of how the registrant is addressing the risk
  • If registrants should be required to discuss the probability of occurrence and the effect on performance for each risk factor? If so, how could we [SEC] modify our disclosure requirements to best provide this information to investors? For example, should we require registrants to describe their assessment of risks?
  • Should registrants be required to disclose the specific facts and circumstances that make a given risk material to the registrant?

While these questions apply to all business risks – not just EHS risks – the end result could mean that companies would have to greatly expand EHS risk reporting. The SEC is far from finalizing the disclosure modernization initiative, but it is worth monitoring.

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