• SEC Climate Change Reporting Requirements and Developments
  • October 18, 2007 | Author: William J. Walsh
  • Law Firm: Pepper Hamilton LLP - Washington Office
  • Although the law is unclear, some companies may decide it is necessary or prudent to report to the Security and Exchange Commission (SEC), and/or pursuant to state disclosure laws, their carbon dioxide equivalent (CO2e)1 emissions and how compliance measures may impact the company in the future.

    On September 17, 2007, Ceres (a national environmental investor group), Friends of the Earth (FOE, a national environmental group), other environmental groups, various states and state pension funds filed a petition requesting an interpretive SEC release clarifying that material climate-related information must be included in corporate disclosures under existing law.

    The petition asserts that many corporations face risks in connection with climate change. Subsequently, these risks fall squarely within the category of material information that is required to be analyzed and disclosed in corporate filings. The petition states that “despite growing investor demands, many companies currently release little information about their exposure to climate risk and their preparedness to address those risks.” The full petition is online at http://www.ceres.org/pub/docs/Full%20Petition.pdf.

    In its analysis, the FOE concluded that many companies are failing to report material environmental issues such as climate change in SEC filings. Since 2000, the FOE has surveyed the SEC reporting of publicly traded companies in the automobile manufacturing, integrated oil and gas, insurance, petrochemical and utilities industries.

    The FOE stated that as of 2005, 49 percent of the companies reported the impacts of climate change (including 100 percent of the electric companies and 78 percent of the oil and gas companies), but only 19 percent of insurers provided climate reporting. The full survey is online at http://www.foe.org/camps/intl/SECFinalReportandAppendices.pdf.

    Irrespective of the petition, the SEC has long recognized in the Securities Act “the need for a narrative explanation of the financial statements, because numerical presentations and brief accompanying footnotes alone may be insufficient for an investor to judge the quality of earnings and the likelihood that past performance is indicative of future performance.” Management Discussion and Analysis (MD&A) “is intended to give the investor an opportunity to look at the company through the eyes of management by providing both a short and long-term analysis of the business of the company.”

    For example, a company should describe trends that are reasonably likely to affect its liquidity or its capital expenditures. A company also must describe “any known trends or uncertainties” that will materially impact income from continuing operations. If new environmental requirements will “soon” become effective, this may have to be covered in the MD&A. Similarly, if operating costs are trending up or down due to environmental requirements, this may have to be addressed.2

    Although not directly relevant to the issue of whether private companies must disclose their climate change impacts and liabilities, Congress, in the 2008 National Defense Authorization Act, has directed the Department of Defense to provide guidance for military planners in their assessment of “the risks of projected climate change to current and future missions of the armed forces” and to update defense plans to incorporate climate mitigation strategies, capacity building, and relevant research and development.

    The question is whether the greenhouse gas emission reduction is sufficiently certain to warrant reporting and, if so, what to include in such a report. With regard to climate change issues, companies should use discretion when deciding how to report long term impact.

    However, companies would be prudent to compare their filings to their competitor’s. If one or more companies in an industry sector identify a significant risk or uncertainty attributable to environmental regulation, a rival company’s failure to address this may trigger a more detailed review by SEC staff when analyzing filings.


    1 Scientists calculate CO2e based on their radiative potential over 100 years to convert the individual concentrations into a common unit that measures the cumulative impact of greenhouse gases. Department of Energy, Units for Measuring Greenhouse Gases, available at http://www.eia.doe.gov/oiaf/1605/gg03rpt/summary/special_topics.html.

    2 For more information on the obligations to report environmental costs and liabilities to the SEC, see W. Walsh, M. Machlin, J. Tibbals, “Environmental Disclosure, New EPA and SEC Initiatives to Encourage Disclosure of Environmental Costs and Liabilities,” BNA Environmental Reporter 217 (Vol. 34, No. 4, ISSN 0013-9211) (January 24, 2003); also online as “EPA Jumps on the Corporate Disclosure Bandwagon” at http://www.pepperlaw.com/pepper/publications_update.cfm?rid=310.0.