September 19, 2007

Climate Change Risk Disclosure: Coming Soon to Your 10-K?

It was widely reported yesterday that efforts are underway to pressure the SEC into requiring more disclosure about the risks associated with climate change. As noted in this Washington Post article, “[n]ow a group of state officials, state pension fund managers and environmental organizations are pressing the SEC to force all public companies to come up with something more useful to investors. Among those who signed the formal petition were Bill Lockyer, California treasurer; Alex Sink, Florida’s chief financial officer; and Richard Moore, North Carolina treasurer. In the petition, to be filed today, the group is asking the commission to require companies to assess and disclose their financial risks from climate change and legislation.”

The group’s 116-page petition is unusual in that it is not a traditional rulemaking petition, which typically asks the SEC to amend its rules to address a particular issue. Rather, the group’s petition seeks Commission interpretive guidance clarifying that, under existing law, companies are required to disclose material information related to climate change. The types of things that the group thinks companies must disclose, depending on the circumstances, are:

– Physical risks arising from climate change that are considered material to operations or financial condition;
– Financial risk and opportunities associated with “present or probable greenhouse gas regulation;” and
– Legal proceedings associated with climate change.

Appendix G of the petition lays out the proposed guidance that the group would like to see the SEC adopt, and it includes an analysis of the applicable GAAP and Regulation S-K requirements that could require disclosure about climate change issues. In addition to submitting the petition, the group also sent a letter to Corp Fin, asking that the Division not necessarily wait for Commission interpretive guidance, but rather pay close attention now to climate change risks when reviewing periodic reports.

These latest communications with the SEC are the culmination of several years of efforts to compel action on climate change disclosure. A group including many of the same investors – organized as the Investor Network on Climate Risk – wrote a letter to Chairman Cox last year, although – according to news reports – previous efforts such as this letter have gone unanswered. In the letter, the group noted efforts dating back to 2004 to have the SEC take additional steps under existing disclosure requirements to elicit better disclosure about climate risk in filings. In addition, that group asked the SEC to revise or change the Staff’s interpretation of Rule 14a-8’s ordinary business exclusion so that companies would be required to include shareholder proposals requesting a report on financial risks due to climate change.

These on-going efforts with respect to climate change reflect the broader trend that SEC disclosure requirements always seem to be a focal point for addressing the issue of the day. Whether it is Year 2000 risks (remember that?), business with countries subject to economic sanctions, computer security risks, the crisis in Darfur or other significant issues, there is often an effort on the part of investors, interest groups and legislators to compel some sort of disclosure in SEC filings. Often, the problem with these efforts is they don’t focus on what information is material to investors, and they rarely recognize that a “one size fits all” approach doesn’t work when it comes to assessing materiality and the applicability of existing disclosure requirements. Climate change may very well stand apart from these other issues when it comes to materiality judgments, given the significant impact that climate change may ultimately have on many companies.

The State of Climate Change Disclosure Today

The group submitting the petition to the SEC indicates that disclosure about climate change in public filings has been “scant and inconsistent.” The group singles out Exxon Mobil and Allstate for their failures to adequately disclose the risks associated with climate change. A January 2007 study by Ceres and the Calvert Group indicated that companies comprising the S&P 500 were doing a poor job of disclosing climate change risks, both through their public filings and the Carbon Disclosure Project questionnaire process.

If you missed our June webconference “Tackling Global Warming: Challenges for Boards and their Advisors,” it is not too late to listen to the audio archive and review the great course materials. In the course materials for the panel entitled “Disclosure Obligations under SEC and Other Regulatory Frameworks,” Miranda Anderson of David Gardiner & Associates outlines some key information about voluntary climate change disclosure. With respect to SEC disclosure, she notes dramatic improvements over the past 5 years in the quantity and quality of disclosure about climate change risk, particularly among electric utilities and in the oil and gas sector. Insurers, automakers and the petrochemical industry have not done as well in this area.

Beyond disclosure concerns about climate change, companies need to focus on other important issues, such as the board’s fiduciary duties, D&O insurance, contracts and due diligence. All of these topics are covered in the “Tackling Global Warming” webconference. We have posted lots of other useful resources in our “Climate Change” Practice Area.

September-October Issue: Deal Lawyers Print Newsletter

The September-October issue of Deal Lawyers is at the printer and includes articles on:

– The “Downturn” Roadmap: Parsing the Shift in Deal Terms
– The “Downturn” Roadmap: A European Perspective
– What Does “Material” Mean?
– Four Things Buyers Need to Know About Successor Liability
– Some Thoughts on Appraisal Under Delaware Law
– The SEC Staff’s Comment Letters: Termination and Change-in-Control Arrangements

Try a 2008 no-risk trial today – and get the “Rest of 2007” free.

– Dave Lynn