SEC Issues Guidance on Climate Change Disclosure

While stressing that it was not expressing an opinion on the scientific debate over the existence of, or causes of, climate change, the Securities and Exchange Commission (SEC) has decided to provide public companies with interpretive guidance on existing SEC disclosure requirements as they apply to business or legal developments relating to the issue of climate change.

The Commission's interpretive release offers guidance on a number of existing rules that may require a company to disclose the impact that business or legal developments related to climate change may have on its business. The relevant rules cover a company's risk factors, business description, legal proceedings, and management discussion and analysis.

"We are not opining on whether the world's climate is changing, at what pace it might be changing, or due to what causes. Nothing that the Commission does today should be construed as weighing in on those topics," said SEC Chairman Mary Schapiro in a January 27 statement announcing the guidance. "Today's guidance will help to ensure that our disclosure rules are consistently applied."

Specifically, the SEC's interpretative guidance highlights the following areas as examples of where climate change may trigger disclosure requirements:

• Impact of Legislation and Regulation: When assessing potential disclosure obligations, a company should consider whether the impact of certain existing laws and regulations regarding climate change is material. In certain circumstances, a company should also evaluate the potential impact of pending legislation and regulation related to this topic.

• Impact of International Accords: A company should consider, and disclose when material, the risks or effects on its business of international accords and treaties relating to climate change.
• Indirect Consequences of Regulation or Business Trends: Legal, technological, political and scientific developments regarding climate change may create new opportunities or risks for companies. For instance, a company may face decreased demand for goods that produce significant greenhouse gas emissions or increased demand for goods that result in lower emissions than competing products. As such, a company should consider, for disclosure purposes, the actual or potential indirect consequences it may face due to climate change related regulatory or business trends.
• Physical Impacts of Climate Change: Companies should also evaluate for disclosure purposes the actual and potential material impacts of environmental matters on their business.

SRI Firms Applaud

Immediately after the SEC announcement, the Social Investment Forum (SIF), a 400 member association of socially and environmentally responsible investment professionals and institutions, issued a press release applauding the Commission's decision.

"This is perhaps the biggest development so far in the long-term campaign to promote wider sustainability reporting," SIF CEO Lisa Woll said in the release. "We welcome today's SEC action as a critical step in the direction of fuller environmental, social and governance (ESG) or sustainability disclosure. Today, we renew our call for mandatory corporate ESG or sustainability reporting."

SIF had been among the more vocal groups calling for the issuance of such a guidance, including it in a list of proposals sent to the SEC last July.

Pax World Management, a SIF member and home of the original SRI mutual fund, issued its own statement in favor of the SEC action, noting that it was one of two asset management firms that joined with 21 other institutional investment representatives in 2007 to petition the SEC to issue guidance on climate risk disclosure.

The Pax World release notes that the firm has long contended that climate change will have significant material effects on corporate financial performance, and therefore on investment performance. In fact, the firm points out that investment analysts now routinely cover climate change as one of the issues that distinguishes companies as either leaders or laggards in their sectors and that the January 14, 2010 Investor Summit on Climate Risk at the United Nations was attended by 450 global investors, including some of the world's largest financial firms and institutional asset owners.