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By: Rikard D. Lundberg
[email protected]
The SEC’s Guidance on
Climate Change
September 16, 2010
Copyright © 2010
Rikard Lundberg
A Sampling from the 2010 Proxy Season
 101 climate and energy-related resolutions with 88 U.S. and Canadian
companies (approx. 50% increase)
 Majority votes: Massey Energy (adoption of quantitative goals for
reducing GHG emissions) and Layne Christensen (issuance of report on
environmental, social and governance (ESG) issues, including GHG
 Proposals testing SEC’s new guidance at ExxonMobil (withdrawn),
Chevron (8.6%) and ConocoPhillips (7.5%) calling for a report on the
financial risks from climate change
 Note: May not exclude proposal under "ordinary business operation"
exclusion in Exchange Act Rule 14a-8(i)(7) if significant policy issues and
sufficient nexus between proposal and registrant (Staff Legal Bulletin
The SEC’s New Guidance on Climate Change
 SEC Interpretive Release 33-9106, effective on February 8, 2010:
“Commission Guidance Regarding Disclosure Related to Climate
 Guidance on existing rules as opposed to new rules
 Practical impacts – a lot is changing:
SEC and investors will examine filings for climate change information
Original petitioners and investors will probe underreporting
Competitors may disclose information to their advantage
Need for in-house staff or outside consultants to monitor new
legislation/regulation, assess “legislative likelihoods” and evaluate climate
change impacts
 Need to expand disclosure controls, disclosure committees, sources of
information and communication channels
SEC Disclosure Framework for Climate
 Sources of climate change disclosure obligations
 SEC guidance on climate change disclosure
 Regulation S-K (non-financial statement disclosures)
 Regulation S-X and GAAP (financial statement disclosures)
 SEC Release 33-5170, “Disclosures Pertaining to Matters Involving
the Environment and Civil Rights” (July 19, 1971)
 SEC reporting framework for public companies
 Periodic reports on Forms 10-K and 10-Q
 Current reports on Form 8-K
 Registration statements
 CEO and CFO certifications under SOX
Climate Change Disclosures and Regulation S-K
 Item 101: Description of business
 Item 103: Legal proceedings
 Item 303: Management’s discussion and analysis of financial
condition and results of operations
 Item 503(c): Risk factors
 Securities Act Rule 408 and Exchange Act Rule 12b-20: other
material information
 Form 8-K (Items 1.01 and 2.06)
 “Materiality” remains a fundamental concept for climate
change disclosure
 Specific materiality thresholds (e.g., Item 103 of Reg S-K)
 Information is material if there is a “substantial likelihood that
a reasonable investor would consider it important in making
an investment decision”
 When in doubt, disclose
 Compliance will require substantial data gathering and
analysis to make materiality determination
Areas of Disclosure under SEC’s Climate Change
 Impact of legislation and regulations, including pending
legislation and regulations
 Impact of international accords
 Physical impacts of climate change
 Indirect consequences of regulation or business trends
Impact of Legislation and Regulation
 Increases in costs of doing business: compliance costs, energy
costs (other pass-throughs), alternative production costs
 Increases in capital expenditures to comply with new laws or
 Item 303 Reg S-K: assess effect of enacted climate change
legislation or regulation: “known uncertainty”
 Reasonable likelihood of enactment
 Reasonable likelihood of material effect on registrant
 Profits from sale of allowance under cap and trade system
Impact of International Accords
 Impacts on international companies or companies sourcing
 EU, Japan, China, Australia, New Zealand all are enacting GHG
emission reduction laws
 Impact of renewable energy laws in other countries and impacts
on competitiveness
 Retaliatory tariffs on U.S. products?
Physical Impacts of Climate Change (Direct/Indirect)
 Disclosable information may include both
 the impact and its consequences
 measures the registrant may take to combat those impacts
 Examples
 Altered weather patterns
 Rising seas, flooding
 Drought and water shortages
 Agricultural shifts
 Human health impacts
 National and International security concerns
Indirect Consequences of Regulation or Business
 Risks of legal, technological, political and scientific developments regarding
climate change
 Decreased/increased demand for and use of carbon-intensive/less carbonintensive products or services
 Impact on reputation (green, clean, good business)
 Pass-throughs from impacted suppliers
 Competitiveness factors are being recognized
 Energy
 Supply/Distribution
 Market access
 Responsiveness
 Indirect consequences can create risks and opportunities across the value
Financial Reporting Considerations
 Materiality under Regulation S-X traditionally has been more
quantitatively focused
 SAB 99 – The omission or misstatement of an item in a financial
report is material if, in the light of surrounding circumstances, the
magnitude of the item is such that it is probable that the judgment
of a reasonable person relying upon the report would have been
changed or influenced by the inclusion or correction of the item
 SFAS No. 5 – If it is probable that a loss has been incurred and
the amount of the loss can be reasonably estimated, the loss
contingency must be accrued by a charge to income and the
nature of the contingency must be described in a footnote to the
financial statements
Internal Disclosure Controls and Procedures
 Management must:
 monitor legislative/regulatory developments
 collect data
 analyze data
 make materiality determinations/quantify uncertainties
 disclose
 Speak with one voice in overlapping fora
 Criminal liability for certifying officers for false certifications
Internal Review Protocols for Climate
 Avoid boilerplate
 Use plain English
 Be consistent in reporting
 Coordinate accounting, legal and valuation disciplines
 Establish/expand disclosure committees
 Hire inside climate change experts or engage outside experts to
monitor proposed legislation, assess potential enactment
 Consider relevance for privately held companies
Examples of Sources for Guidance on
Climate Change Disclosure
 SEC filings made by utility, oil and gas, insurance or other companies already
 American Society for Testing and Materials (ASTM) Standard: “Guide for
Financial Disclosures Attributed to Climate Change”
 Climate Disclosure Standards Board (CDSB)
 Corporate responsibility/sustainability reporting
 National Association of Insurance Commissioners (NAIC) mandatory climate risk
disclosure for insurance companies with annual premiums over $500 million
 EPA GHG inventory beginning in 2011 for 10,000 facilities that emit more than 25,000
metric tons of GHG annually
Likely Responses to Climate Change
 Ordinary course review by SEC staff, with new emphasis
 Outside review/critique by NGOs and investors, etc.
 Increased volume of shareholder proposals
 More “green” proxy battles
 More detailed, refined disclosures
Climate Change Analysis and Disclosures
for Private Companies
 Private companies may choose to follow disclosure practices of public
 In preparation for IPOs
 As a result of developing best practices in offering documents
 To become more attractive to a public company acquiror
 For competitive, social or other reasons
 Pressure from the public, investors and regulators
Climate Change Disclosure and Enterprise
 Climate change has reportable risks based on customer demand,
competition, seasonality and regulatory compliance expenditures
 Value impacts can be measured
 Impact of legislation and regulation – green energy vs. power
generation sectors
 Physical impacts of climate change – agriculture, forestry and ski
 Seasonality risks impacts captured within market prices
 Impact of climate change risks on corporate decisions
 Rejecting the SEC’s guidance will buck a significant disclosure trend
 Compliance will require substantial data gathering and analysis to make
materiality determinations
 Companies should pay attention to the composition and procedures of disclosure
 Companies should consider retention of outside advisors for climate change
impact analysis and disclosures
 Companies operating or sourcing internationally may need outside assistance to
analyze impact of international or foreign climate change regulations
 Companies’ disclosures in SEC documents should be consistent with all other
public disclosures
 Disclosure of carbon footprint is not mandated
Contact Information
Rikard Lundberg
Brownstein Hyatt Farber Schreck, LLP
410 Seventeenth Street, Suite 2200
Denver, CO 80202
Ph: 303-223-1232
Fax: 303-223-8032
Email: [email protected]
Brownstein Hyatt Farber Schreck, LLP