A Closer Look at SEC Guidance on Climate Change

In 2010, the Securities and Exchange Commission (SEC) issued guidance to remind public companies of their existing obligations to consider climate change and its consequences as they prepare disclosure documents. In doing so, the SEC acknowledged that climate change could have a material positive or negative effect on a company’s performance — and that investors want to know more.  

Potential effects

Climate change can affect performance in many ways. For example, complying with federal regulations requiring greenhouse gas emission reduction and “cap-and-trade” laws could drain a company’s financial resources. There could also be an indirect effect as these costs are passed down the global supply chain. Alternatively, cap-and-trade programs could create trading markets for emission credits. Companies that have more allowances than they need may be able to raise revenue through selling these instruments. 

There also may be significant physical effects of climate change — such as increasing storm intensity or temperature extremes — that could have a material impact on demand for products or services. For example, warmer temperatures could reduce demand for residential and commercial heating fuels, service and equipment.

Existing disclosure requirements

Regulation S-K requires public companies to disclose climate change–related matters in the following sections of their financial statements:

Description of business. This disclosure describes the business and that of its subsidiaries, including information about its form of organization, principal products and services, major customers, competitive conditions and costs of complying with environmental laws. 

Legal proceedings. This disclosure briefly explains any material pending legal proceedings in which the company, any of its subsidiaries and any of its property are involved. It includes disclosure of environmental litigation arising under any federal, state or local regulations regarding the discharge of materials into the environment or protection of the environment.

Risk factors. These disclosures highlight the most significant factors that make an investment in the company speculative or risky. 

Management’s discussion and analysis (MD&A). These disclosures enable investors to see the company’s liquidity, capital resources and financial results through the eyes of management. Here, companies must identify known trends, events, demands, commitments and uncertainties that are reasonably likely to have a material effect on financial condition or operating performance.

In addition to explicit disclosure requirements, Securities Act Rule 408 and Exchange Act Rule 12b-20 require a registrant to disclose “such further material information, if any, as may be necessary to make the required statements, in light of the circumstances under which they are made, not misleading.”

© 2014