Last week the SEC posted to its website guidance regarding disclosure related to climate change. The guidance does not create new rules; rather, it helps explain current rules. In general, a company might be expected to make climate-change related disclosures in its risk factors, business description, legal proceedings, and management discussion and analysis. Some of the key aspects of the guidance include:
- Risk factor disclosure may require a description of existing or pending legislation that relates to climate change;
- When disclosing pending legislation, first consider if it is reasonably likely to come to fruition; if yes, disclose the legislation unless it will not have a material effect on financial condition even if it becomes law;
- Consider disclosure of both negative and positive known trends, such as pending legislation. For example, some companies may presumably benefit from a “cap and trade” system by operating below their emissions allotment. (However, it would be difficult to make meaningful positive disclosures without knowing what the “cap” would be);
- Whether an item of disclosure is material depends on the substantial likelihood that an average investor would consider it important;
- Consider and disclose the potential affects of international treaties and accords, the business consequences of regulation (such as increased demand for goods that result in lower emissions), and the physical impacts of climate change (such as how severe weather would affect the supply chain).
The guidance is not intended to be a statement on the political aspects of climate change. In voting to release the guidance, SEC Chairman Mary Schapiro noted that nothing in the guidance should be construed as “opining on whether the world’s climate is changing, at what pace it might be changing, or due to what causes.”