Interpretive Guidance on Disclosure Regarding Climate Change

Client Advisory

April 22, 2010

In January 2010, the SEC issued an Interpretive Guidance on disclosure requirements related to climate change. This Guidance stems from the September 2007 petition of Ceres and a coalition of U.S. institutional investors, the New York Attorney General, various state treasurers, comptrollers and chief financial officers, and several asset management firms asking that the SEC issue formal guidance on the circumstances when public companies should disclose risks related to climate change under existing law. (Ceres is a national network of investors, environmental organizations and other public interest groups working with companies and investors to address sustainability challenges such as global climate change. Members include CalPERS, similar eco-minded investor and pension groups, states, and others.)

The SEC Guidance provides interpretative guidance to public companies on their existing obligations to disclose the effects that climate change and related developments may have on their business. The SEC Guidance does not modify the text of any SEC rule, and it does not alter the definition of what constitutes material information, i.e., whether there is a substantial likelihood that a reasonable investor would consider the information important in deciding how to invest.

The SEC Guidance is generally applicable to all issuers. However, it has special relevance to companies in the oil, gas, energy and petrochemical sectors, where climate change regulations, public policy and energy prices may present particular risks or opportunities. The same is true for manufacturing firms where production processes, inventory availability or fuel costs could be affected either directly by climate change or by regulatory responses to climate change. Real estate developers, transportation firms and infrastructure suppliers may also be affected by local, state or federal land-use initiatives aimed at reducing or adapting to climate change impacts.

A.     Possible Sources of Climate Change Consequences.

The Guidance highlights four possible sources of the consequences of climate change that may require disclosure:

1.      Effect of existing or pending legislation, regulation, or litigation.

Existing Laws:

  • EPA already mandates measurement and reporting of GHG emissions;
  • EPA finalized in March, 2010 new rules that will result in emissions limits on a significant number of facilities; and
  • State and Regional Efforts.

Potential Effects:

  • Costs required to improve facilities and equipment to reduce emissions;
  • Profits or losses from the sale or purchase of credits under “cap and trade” systems; and
  • Changes to earnings resulting from increased or decreased demand for goods and services or changes in costs of goods sold.

2.      Effect of international accords and treaties relating to climate change.

  • Kyoto-driven laws including EU/ETS (cap and trade); and
  • Copenhagen Accord: US pledge to cut GHG emissions 17% by 2020.

3.      Physical effects of climate change.

  • Severity of weather (e.g., floods and hurricanes), sea levels, arability of farmland, and water availability and quality; and
  • Possible associated risks, e.g., decreased agricultural production, damage to physical plants and properties, disruption of operations of customers or suppliers.

4.      Indirect consequences of climate change regulation and resulting business trends.

  • Decreased demand for goods that produce significant greenhouse gas emissions or increased demand for goods that result in lower emissions;
  • Increased demand for generation and transmission of energy from alternative energy sources;
  • Increased competition to develop innovative products;
  • Decreased demand for services related to carbon based energy sources;
  • Increased need for acquisitions of plant or equipment to take advantage of potential opportunities; and
  • Adverse consequences of reputational damage as a result of a high level of greenhouse gas emissions.

B.     Specific line item disclosure requirements in Regulation S-K that elicit climate change related disclosure.

1.      Business. S-K Item 101 requires disclosure of:

  • Material costs of complying with environmental laws affecting capital expenditures, earnings and competitive position.
  • Material capital expenditures for environmental control facilities for the remainder of the issuer’s current fiscal year and its succeeding fiscal year and further periods as may be material.

2.      Legal Proceedings. S-K Item 103 requires disclosure of:

  • Material pending legal proceedings except ordinary routine litigation incidental to the business.
  • Any proceeding brought by a governmental authority under environmental laws unless monetary sanctions will be less than $100,000.

3.      Risk Factors. S-K Item 503(c) requires disclosure of:

  • The most important factors that make an investment in the issuer risky, including any risks related to climate change or regulatory actions.

4.       Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”). S-K Item 303 requires disclosure of:

  • Management’s view of the issuer’s financial condition and results of operations.
  • Disclosure of known trends or uncertainties that are reasonably likely to have a material effect on the issuer’s financial condition or results of operations (i.e., in liquidity, capital resources, net sales or revenues, or income from ongoing operations).
  • Analysis
    • Information Considered. Although only material information need be disclosed, when considering information for disclosure, all relevant information must be considered – not just material information.
    • Known Trends and Uncertainties.
      First, is a trend or uncertainty reasonably likely to occur? If not - no disclosure needed.
      Second, if management cannot determine that the trend or uncertainty is not reasonably likely to occur (i.e., does not know), then management must evaluate the consequences assuming that the trend or uncertainty does occur:
      • Disclosure is required unless management determines that a material effect on financial condition or results of operations is not reasonably likely (i.e., it is not material).
      • If material, management must disclose difficulties involved in assessing effect of amount and timing of uncertain events and provide an indication of time periods in which resolution of uncertainties is anticipated.
    • Opportunities.
      Disclosure is not limited to adverse consequences. There may be opportunities that the company may be able to take advantage of that should be disclosed.

5.      Controls. 

Issuers should consider whether they have sufficient disclosure controls and procedures to collect the climate change information, bring it to the correct group for analysis, evaluation, making disclosure decisions and timely inclusion in SEC reports.

6.      Summary of Analysis. The issuer:

  • Must consider the effect of a particular fact or circumstance under each Reg. S-K requirement;
  • Must be specific/not generic;
  • Must assess likelihood and effect of fact or circumstance; and
  • Must consider both positive and negative effects of the fact or circumstance.

7.      Foreign Private Issuers.

Form 20-F governs the disclosure requirements of foreign private issuers, not Regulation S-K. Generally, the requirements of Form 20-F are similar to those of Reg. S-K, although some requirements are not as prescriptive as Reg. S-K.

The following provisions may require disclosure of climate change issues material to the issuer’s business:

  • Item 3.D:  requires a foreign private issuer to disclose its material risks.
  • Item 4.B.8: requires a foreign private issuer to describe the material effects of government regulation on its business and to identify the particular regulatory body.
  • Item 4.D: requires a foreign private issuer to describe any environmental issues that may affect its use of its assets.
  • Item 5: requires:
    • management’s explanation of factors that have affected the company’s financial condition and results of operations for the periods covered by the financial statements; and
    • management’s assessment of factors and trends that are anticipated to have a material effect on the company’s financial condition and results of operations in future periods.
  • Item 8.A.7: requires a foreign private issuer to provide information on any legal or arbitration proceedings, including governmental proceedings, which may have, or have had in the recent past, significant effects on the company’s financial position or profitability.
  • Forms F-1 and F-3: require a foreign private issuer to provide the information, including risk factor disclosure, required under Regulation S-K Item 503.

8.      Litigation in the Environmental Area Affecting Disclosure.

Public Nuisance Claims. Several federal cases have considered climate change claims on a public nuisance theory:

  • Connecticut v. AEP (2nd Cir. Sept. 19, 2009), which permitted claims against power generators for their contribution to global warming.
  • Comer v. Murphy Oil (5th Cir. Oct. 16, 2009), where plaintiffs were found to have standing to assert public and private nuisance and related claims.
  • Kivalina v. ExxonMobil Corp. (N.D. Cal. Sept. 30, 2009), where plaintiffs' claims for nuisance under federal common law were barred because they raised political questions better left to other government branches.

9.      NYS Attorney General Settlements under NY Gen. Bus. Law Sec. 352 and NY Exec. Law Sec. 63(12). 

These settlements require the companies to enhance their reporting of climate change risks in SEC filings. The following companies entered into such settlement agreements with the NYS Attorney General:

Dynegy Inc.,
AES Corporation, and
XCEL Energy Inc.

The settlement agreements are based on the perceived inadequacy of the company’s disclosures to investors concerning the expected impact of climate change and the regulation of greenhouse gas emissions on the company’s operations, financial condition and in two cases plans to construct coal-fired electric generating units. The actions were brought under NY General Business Law Sec. 352 (fraud) and NY Executive Law Sec. 63(12) (repeated fraudulent or illegal acts).

10. SEC’s Next Steps.

  • The Investor Advisory Committee of the SEC is considering climate change disclosure issues as part of its overall mandate to provide advice and recommendations to the SEC.
  • The SEC is planning to hold a public roundtable on disclosure regarding climate change in the spring of 2010.

11.  Climate Change Disclosures in Recent Annual Reports

We have compiled the climate change disclosures made by a number of U.S. and foreign companies in their most recent annual reports, organized by the line item of Regulation S-K or Form 20-F that requires each disclosure; a PDF of this compilation is available here.

Questions regarding this advisory should be addressed to Guy P. Lander (212-238-8619,

Carter Ledyard & Milburn LLP uses Client Advisories to inform clients and other interested parties of noteworthy issues, decisions and legislation which may affect them or their businesses. A Client Advisory does not constitute legal advice or an opinion. This document was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. © 2020 Carter Ledyard & Milburn LLP.
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