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Existing SEC Interpretation on Climate Change Disclosures

By | September 22, 2021

In 2010 the SEC issued an interpretive release on registrant’s disclosures related to climate change. Public pronouncements indicate the SEC s in the process of formulating updated rules.  In all likelihood any new rule would not be effective for the upcoming proxy season.

The SEC has issued sample comments related to compliance with the interpretive release which should be reviewed when determining compliance with the interpretive release

The 2010 interpretation begins by citing existing SEC rules which can trigger climate change disclosures in the following areas:

  • Description of business
  • Legal proceedings
  • Risk factors
  • Management’s discussion and analysis

The 2010 interpretation then goes on to discuss some of the ways climate change may trigger disclosure required by the current commission rules.

Impact of Legislation and Regulation. Significant developments in federal and state legislation and regulation regarding climate change may trigger disclosure.   Existing federal, state and local provisions which relate to greenhouse gas emissions may require disclosure of any material estimated capital expenditures for environmental control facilities.

Risk factor disclosure may be required regarding existing or pending legislation or regulation that relates to climate change. Registrants should consider specific risks they face as a result of climate change legislation or regulation.

The current MD&A rules, which have been revised since the 2010 interpretation, require disclosure of known trends or uncertainties that have had or that are reasonably likely to have a material favorable or unfavorable impact on net sales or revenues or income from continuing operations and any known material trends, favorable or unfavorable, in the registrant’s capital resources.

According to the 2010 interpretation, 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.

International Accords. Registrants also should consider, and disclose when material, the impact on their business of treaties or international accords relating to climate change. The potential sources of disclosure obligations related to international accords are the same as those discussed above for U.S. climate change regulation. Registrants whose businesses are reasonably likely to be affected by such agreements should monitor the progress of any potential agreements and consider the possible impact in satisfying their disclosure obligations based on the MD&A and materiality principle.

Indirect Consequences of Regulation or Business Trends.

Legal, technological, political and scientific developments regarding climate change may create new opportunities or risks for registrants. These developments may create demand for new products or services, or decrease demand for existing products or services. For example, possible indirect consequences or opportunities may include:

  • Decreased demand for goods that produce significant greenhouse gas emissions;
  • Increased demand for goods that result in lower emissions than competing products;
  • Increased competition to develop innovative new products;
  • Increased demand for generation and transmission of energy from alternative energy sources;
  • Decreased demand for services related to carbon based energy sources, such as drilling services or equipment maintenance services; and
  • Adverse impact on the registrant’s reputation.

According to the 2010 interpretation, these business trends or risks may be required to be disclosed as risk factors, in MD&A or the business description.

Physical Impacts of Climate Change.  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, have the potential to affect a registrant’s operations and results.

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;
  • Increased insurance claims and liabilities for insurance and reinsurance companies;
  • Decreased agricultural production capacity in areas affected by drought or other weather-related changes; and
  • Increased insurance premiums and deductibles, or a decrease in the availability of coverage, for registrants with plants or operations in areas subject to severe weather.

According to the 2010 interpretation, registrants whose businesses may be vulnerable to severe weather or climate related events should consider disclosing material risks of, or consequences from, such events in their publicly filed disclosure documents.

Contact Steve Quinlivan for more information.