SEC Guidance on Disclosure Related to Climate Change

How SEC disclosure requirements in “Regulation S-K” are impacted and what risks companies face from climate change legislation and regulatory developments that may trigger a disclosure obligation.

January 2011
by James Fornaro/Journal of Accountancy

In February 2010, the U.S. Securities and Exchange Commission (SEC) issued an interpretive release titled Commission Guidance Regarding Disclosure Related to Climate Change (Release Nos. 33–9106; 34–61469; FR–82) that provides guidance concerning disclosures related to the impact of climate change and related legislative and regulatory developments. The release provides assistance to public companies in satisfying existing disclosure responsibilities under federal securities laws. It does not, however, establish new disclosure obligations or amend existing rules.

The release is significant in that it forces management to examine the issue of climate change and assess the impact on their businesses — perhaps for the first time. The SEC has promised follow-up actions on the topic and additional rules may be forthcoming. CPAs need to be aware of the underlying business risks associated with climate change, be mindful of evolving legislative and regulatory developments and monitor future SEC actions in this area.

This article provides an overview of existing SEC disclosure requirements in “Regulation S-K” that are impacted by the release and a discussion of particular risks that companies face from climate change legislation and regulatory developments (both domestic and international) that may trigger a disclosure obligation. Other company risks identified by the SEC, including the physical impacts and other “indirect consequences” from climate change, are also presented.

Disclosures in Sec Filings Impacted by the Release

The release was effective February 8, 2010, making it applicable to 10-K reports and pertinent SEC filings made after that date. This article includes sample disclosures from 10-K reports filed after the effective date to illustrate how registrants have responded to the new guidance.

The SEC’s uniform disclosure system includes requirements pertaining to nonfinancial statement disclosures in “Regulation S-K,” which is required in registration statements filed under the Securities Act of 1933 and in annual or other periodic reports filed under the Securities Exchange Act of 1934. (Foreign private issuers follow rules set forth in Form 20–F and other forms.) The release may impact four particular items within the disclosure requirements under Regulation S-K:

  1. Item 101: Description of business. This item requires the registrant to provide a discussion about the historical development of the business, a narrative description of its business activities and financial information about reportable segments. Discussion matters include principal products and services, markets, sources and availability of raw materials, competitive conditions and other issues. Item 101 also requires two types of disclosures related to an entity’s compliance with environmental regulations. One pertains to “the material effects that compliance with Federal, State and local [environmental] provisions which have been enacted or adopted regulating the discharge of materials into the environment or otherwise relating to the protection of the environment, may have upon the capital expenditures, earnings and competitive position of the registrant and its subsidiaries.” A second disclosure is required of material anticipated capital expenditures for environmental control facilities for the current year, succeeding year and future periods as deemed material by the company.
  2. Item 103: Legal proceedings. Filers are required to describe any “material pending legal proceedings, other than ordinary routine litigation incidental to the business, to which the registrant or any of its subsidiaries is a party” including those unfavorable and favorable to the registrant. Similar information is required for any legal proceedings known to be contemplated by governmental authorities.

    Specific materiality thresholds are provided to assess whether a disclosure is required under Item 103. For example, disclosure of legal proceedings is required if the amount of potential claims exceeds 10 percent of consolidated current assets. Moreover, legal proceedings related to environmental matters that involve a governmental authority must be disclosed if amounts exceed $100,000.

This article has been excerpted from the Journal of Accountancy. View the full article here.