10K Season - Disclosing the Risks and Opportunities Presented by Climate Change
As companies prepare their 2007 10K filings to the U.S. Securities and Exchange Commission (SEC), issues surrounding disclosure of the risks and opportunities presented by climate change loom like an iceberg awaiting the passing of the Titanic. Despite numerous appeals from a variety of sources, the SEC has yet to issue interpretive guidance describing how companies should disclose climate change impacts.
Institutional investors, groups such as Ceres, and traditional environmental groups are demanding that public companies identify and quantify the impacts of climate change on their business. As recently as two years ago, shareholder resolutions relating to climate change were rare and generally considered “nuisance” resolutions. No more. Such resolutions abound and must be treated seriously.
In September of 2007, an ad hoc coalition petitioned the SEC to issue guidance “clarifying that material climate-related information must be included in corporate disclosure under existing law.” The petition requests that the SEC require disclosure in three areas: (1) physical risks associated with climate change that are material to a company’s financial condition, ranging from impacts resulting from changing weather conditions to direct impacts on water availability or natural resources; (2) financial risks associated with current or likely international and domestic climate change law and regulation; and (3) legal proceedings, including litigation that may impact entire industry sectors.
In December 2007, Senator Christopher Dodd reiterated to SEC Chairman Christopher Cox the need for guidance, including clarification on whether “registrants should assess the consequences of climate change and the existing and anticipated future government regulation of greenhouse gas emissions.” The SEC has yet to respond to either request.
Even without additional guidance, a serious case can be made that existing disclosure requirements provide sufficient grounds to challenge the lack of disclosure. The following SEC regulations are among those relevant to climate change disclosure:
- Item 101 of Regulation S-K requires disclosure of “material effects” that costs related to environmental compliance may have on the “capital expenditures, earnings, and competitive position” of a company. This includes disclosure of “contingent” effects, as well those effects that are known or certain.
- Item 103 requires disclose of material pending legal proceedings involving the company, include those that are “known to be contemplated” by governmental authorities.
- Item 303 is a broader Management Discussion and Analysis that requires disclosure of “currently known trends, events, and uncertainties that are reasonably expected to have material effects” on the business. SEC regulations require the discussion to include uncertainties that are reasonably likely to occur, and that are reasonably likely to have a material impact on the business.
It appears increasingly likely that a set of national carbon regulations will be enacted in the United States that will impact - directly or indirectly - every sector of the economy. Multinational corporations are already subject to carbon regulations throughout the world - from cap-and-trade programs in Europe to vehicle-specific fuel economy standards in China. These are “known” trends that multinational companies must consider as they gather information for SEC filings.
And this is just the beginning. Climate change has moved quickly from being an issue largely addressed by companies seeking to enhance their environmental bona fides, to one that every public company should address. See, for example, the Climate Disclosure Project, which receives annual voluntary reports from major companies on climate risks and greenhouse gas accounting procedures. The 10K deadline is fast approaching - an iceberg just visible on the horizon - and public companies that pay insufficient attention now risk disaster.