Law and the Environment : Environmental Lawyer & Attorney : Foley Hoag Law Firm : Boston, Washington D.C.

 A year has passed since the SEC issued an interpretive release describing the kinds of climate change related disclosures that the Commission believes should be reported by all publicly traded companies, but many questions still remain regarding how to comply.  With annual 10-K filings due at the end of this month, concrete examples of best practices in disclosures could be very helpful.  Potentially useful is a new report by Ceres that examines the state of disclosures in FY 2009 SEC filings to identify specific examples of how well companies are disclosing information that is important to investors. 

The report identifies five categories of climate risks and opportunities: regulatory risk and opportunity; indirect consequences or business trends; physical impacts; greenhouse gas emissions; and strategic analysis of climate risk and emissions management. Using a system to rank various disclosures within these categories as poor, fair, and good – no company’s practices qualified as “excellent” – the report provides specific examples of what works and what does not.  

The report also includes an 11-point checklist with recommendations for improving disclosures. The recommendations include integrating consideration of climate risk and opportunity throughout the firm, creating a board-level committee with specific responsibility for climate change risks, and using specific numbers and dollar figures in disclosures to quantify emissions, risks and opportunities whenever possible. 

Of course, the report is not legal advice on what any company should disclose to the SEC, and Ceres has no authority to require companies to follow its suggestions.  Ceres is a network of investors, environmental organizations and other public interest groups with a mission to integrate sustainability into capital markets.  Not surprisingly, the report promotes that agenda, ranking the more specific disclosures higher, and encouraging increased transparency in companies' reports.

Other reports and resources also provide guidance in this area: both general statements of investor expectations such as the Global Framework for Climate Risk Disclosure and the ASTM Standard on Financial Disclosures Attributed to Climate Change; as well as sector-specific rules and guidance like the National Association of Insurance Commissioners’ Insurer Climate Risk Disclosure Survey, and the Global Climate Disclosure Frameworks for the oil and gas, automotive, and electric utility sectors.

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Now that the SEC has indicated that public companies should be considering climate change in evaluating financial risks, the pressing questions include what should be evaluated and how it should be reported.  ASTM's newly released standard on Financial Disclosures Attributed to Climate Change, E2718-10 may be just the thing.  The standard, which has been under development for the last 2 years, provides guidance on processes for identifying, quantifying and disclosing potential material impacts related to climate change, both the benefits and liabilities. 

As with much in financial disclosures, the trick is to find the right balance.  ASTM notes that it will not be possible to eliminate uncertainty regarding the financial impacts of climate change, and cautions that subsequent disclosures should not be used to criticize previous disclosures, which hindsight and new standards may paint with an unfairly harsh light.  ASTM has also acknowledged that the costs to obtain information about the financial impacts of climate change should not outweigh the benefits of the information, but that it is important to use all of the relevant and reasonably ascertainable information a company can access.

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Just over a year ago, we noted the surprising, unanimous decision by the National Association of Insurance Commissioners (NAIC) to adopt rules requiring insurers to publicly disclose the impacts of climate change on their business decisions, to begin May 1, 2010.  Well, not so fast.   As Climate Wire reported, at Sunday's NAIC meeting, a the commissioners voted 27-22 to make the disclosure rules optional for states to adopt, submissions to be voluntary, and insurers' survey answers to be kept confidential.

The revised questionnaire adopted by NAIC includes the same 8 questions that were endorsed at last year's meeting, but notes that submission of the survey is at each state's discretion and that insurers' responses will be considered confidential.  Instead of publishing all responses, as originally envisioned, participating states will work with NAIC to develop a public report which will give information about insurers' responses in the aggregate. 

Now that the states may have different requirements, NAIC set out rules for what happens when an insurer serves multiple states with different disclosure rules -- the surveys are intended to be submitted to the regulator of the insurer group's lead state (i.e. the one with the largest direct written premium).  Such a rule could make disclosure particularly interesting if California goes ahead with its own set of proposed rules and mandatory disclosures, as California controls a large segment of the insurance industry.

NAIC's seemingly abrupt policy change comes on the heels of the SEC's interpretive release requiring companies to disclose climate change risks when appropriate, which might have created some overlap with mandatory insurer disclosures.  Per the NAIC Task Force's January minutes, it seems like the commissioners may have decided to let the SEC regulate instead.   

Another interesting update is the revised questionnaire's disclaimer denying that the survey expresses an opinion on the existence or absence of climate change.  Was the disclaimer motivated in part by the National Association of Mutual Insurance Companies' comments to NAIC about the "questionable integrity" of contemporary climate science in the wake of the release of emails from the University of East Anglia's Climate Research Unit?

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For those of you who missed it, the SEC finally issued an interpretive release last week clarifying public company disclosure obligations concerning climate change. Rather than rehash it here, I am instead linking to the client alert that we did on the topic.

It is worth noting that, as mentioned in the alert, the release has engendered significant political controversy. Indeed, ranking member Spencer Bachus sent a letter to the SEC questioning the appropriateness of the release. My favorite question in the letter:

Do you believe the Commission’s role is to promote a social policy agenda through the securities laws and regulations?

I wonder how the SEC will answer that one?

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The U.S. Securities and Exchange Commission (SEC) issued interpretive guidance yesterday which requires publicly traded companies to consider the impacts of climate change – both the physical damage it could cause, as well as the economic impacts of domestic and international greenhouse gas emissions-reduction rules – and disclose those risks to investors. As we noted when discussing the potential for this announcement in October, the disclosure requirements are likely to affect companies in a wide range of industries. 

In its press release announcing this decision, the SEC said that this interpretive guidance neither creates new legal requirements nor modifies existing ones; rather, SEC guidance is intended to provide consistency among issuers in their disclosure to shareholders of bottom-line risks and consequences. The guidance will cover:

• Risk Factors
• Description of the Business
• Legal Proceedings
• Management’s Discussion and Analysis

The interpretive release will be published in the Federal Register and posted on the SEC’s website. The press release summarizes the key points as these:

• Impact of Legislation and Regulation: When considering potential disclosure obligations, companies should determine whether the impact of existing laws and regulations regarding climate change is material. In some cases, companies should also evaluate the potential impact of pending legislation and regulation related to environmental issues and climate change.
• Impact of International Accords: Companies should consider, and disclose if material, the risks related to or effects upon their 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 both new opportunities and new risks for companies. For example, 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. Companies should consider the actual or potential indirect consequences they 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 impact of environmental matters on their business. It is not entirely clear what the SEC means by this, although one example might be agricultural risks associate with altered climate trends that appear to have reduced or increased annual rainfall in particular locales.

When the interpretive release is available, we will provide you with full information. It is likely that pressure from shareholder groups on this issue will continue (here, for instance, is CERES' statement), given that cap-and-trade legislation appears bogged down in Congress and that the prospects for EPA regulation under the Clean Air Act are unclear.

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The US Securities and Exchange Commission released a staff bulletin yesterday that reverses a Bush administration policy that excluded shareholder resolutions which asked companies to disclose their climate-related financial exposure. While not the rule-making we discussed last week, this could be a significant change for the boards of large companies who may now be forced to respond to shareholder concerns about the risks that greenhouse gases and climate change can create.

The Bulletin states that going forward, the Corporation Finance Division will no longer automatically allow the exclusion of proposals that deal with the evaluation of risk, but will look at the subject matter giving rise to the risk.  The Division will generally not permit a company to exclude a shareholder proposal that deals with significant policy issues relating to the evaluation of risk.  The Division noted in its decision that risk management and risk oversight can have major impacts not only on the shareholders, but on the company itself, and that application of the Bush administration framework in SLB No. 14C led to unwarranted exclusions.

CERES, which had long lobbied for such a change in the SEC's policies, applauded yesterday’s announcement, concluding that “the guidance strikes the right balance of ensuring that resolutions about critical matters reach company share owners, without opening the floodgates to proposals of more questionable significance.”

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The U.S. Securities and Exchange Commission is re-examining its rules regarding whether companies should or must disclose climate change related risks. According to an article in ClimateWire, revisions could be issued by the end of October. On Friday, SEC Commissioner Elisse Walter said that SEC staff are working on preparing recommendations, and two options are still on the table. One option is a rule-making that would set specific rules for disclosing climate risks. The other would be a re-interpretation of Form 10-K disclosure rules to require companies to disclose and comment on operations tied in with mitigating climate-change risks.

These changes likely result from frequent criticism by shareholder groups that companies are ducking requirements under the current SEC rules to disclose the climate-related liabilities they face from greenhouse gas emissions, including emerging regulations, rising commodity prices, potential for property damage and long-term costs associated with replacing equipment and infrastructure after climate-related risks take their toll. Spurred on by shareholder initiatives and corporate social responsibility programs, a number of businesses have already started to voluntarily report their climate risks and disclose information on potential financial impacts. But, as stated in the Investor Network on Climate Risk's most recent letter to the SEC on this issue, climate risk disclosures in SEC filings still remain relatively rare. A June 2009 survey by INCR and CERES found that only two of 100 companies in the oil and gas, electric power, coal, insurance and transportation sectors disclosed more than half of the climate-related information sought by investors in their Q1 2008 reports. Changes to the SEC rules could make such reporting a requirement.

Even with forthcoming changes to the rules, the SEC's Walter urged companies not to wait for the SEC to act. As ClimateWire reported, "People should be looking at their own particular facts and circumstances," Walter said. "For example, if you're operating a plant in an area where there's drought, and there are serious water needs, and you don't know if you can satisfy them, costs will triple. That would be one example."
 

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