U.S. climate change disclosure – What should companies be thinking about?

As public companies wait for the U.S. Securities and Exchange Commission (the “SEC”) to issue its climate change disclosure proposal, the SEC staff has issued a “sample letter” that provides guidance about the climate-related disclosure that companies should currently be making in their SEC filings. 

The sample letter collates comments that the SEC staff may issue to companies during the SEC filing review process regarding their climate-related disclosure. Much of the sample letter reiterates the SEC’s 2010 climate change guidance, and earlier this year the SEC staff had already been directed to focus its disclosure review on companies’ compliance with that guidance. 

Companies should expect the SEC staff to comment on their disclosure in the following areas: 

• General – If a company provides more expansive disclosure in its corporate social responsibility report (“CSR report”) than in its SEC filings, the SEC staff will ask for an explanation of the consideration it gave to providing the same type of climate-related disclosure in its SEC filings as in its CSR report. Some companies may choose to include the same disclosures in their SEC filings, but should consider the increased liability risk (namely, under Section 18 of the Securities Exchange Act of 1934) of doing so. In this case, the SEC staff may be satisfied with an explanation rather than requiring additional disclosure. 
• Risk Factors – The SEC staff expects companies to disclose: 
  • Transition risks – the material effects of transition risks related to climate change, such as policy and regulatory changes that could impose operational and compliance burdens, market trends that may alter business opportunities, credit risks or technological changes; and 
  • Litigation risks – any material litigation risks related to climate change and the potential impact on the company.
• Management’s Discussion and Analysis 
  • Recent legal and regulatory developments – The SEC staff expects companies to identify material pending or existing climate change-related legislation, regulations and international accords, and describe any material effect on their business, financial condition and results of operations.
  • Capital expenditures – Companies should identify any material past and/or future capital expenditures for climate-related projects, and if material, quantify those expenditures.
  • Indirect consequences – To the extent material, companies should discuss the indirect consequences of climate-related regulation or business trends, such as the following:
    • decreased demand for goods or services that produce significant greenhouse gas emissions or are related to carbon-based energy sources;
    • increased demand for goods that result in lower emissions than competing products;
    • increased competition to develop innovative new products that result in lower emissions;
    • increased demand for generation and transmission of energy from alternative energy sources; and
    • any anticipated reputational risks resulting from operations or products that produce material greenhouse gas emissions. 
  • Physical effects – If material, companies should address the physical effects of climate change on their operations and results, including: 
    • the severity of weather, such as floods, hurricanes, sea levels, arability of farmland, extreme fires, and water availability and quality;
    • the quantification of material weather-related damages to their  property or operations;
    • the potential for indirect weather-related impacts that have affected or may affect their major customers or suppliers;
    • the decreased agricultural production capacity in areas affected by drought or other weather-related changes; and
    • any weather-related impacts on the cost or availability of insurance.
  • Compliance costs – The SEC staff will ask companies to quantify any material increased compliance costs related to climate change.
  • Carbon credits/offsets – If material, companies should disclose their purchase or sale of carbon credits or offsets and any material effects on their business, financial condition and results of operations.

As companies prepare registration statements in connection with securities offerings or begin the process of preparing upcoming periodic and/or annual filings, they should consider the content of the sample letter and the SEC’s expectation of more detailed disclosure regarding the impact of climate change in these areas. Furthermore, SEC registrants should consider how their disclosure controls and procedures are applied to the preparation and review of their climate-related disclosures. 

We will continue to monitor developments in this area and encourage you to contact us if you have any questions about climate change disclosure.