Following the Copenhagen Climate Change Convention in December 2009, governments around the world are increasing their focus on climate change and its associated risks. In the US, this may include action by Congress and several new administrative measures by the Environmental Protection Agency (EPA).
These developments are likely to present challenges for many public companies, including those involved in mining, in providing appropriate disclosure regarding the potential impact of climate change on their businesses in their periodic reports filed with the Securities and Exchange Commission (SEC).
While a number of energy firms, utilities and other companies now include climate change disclosures in their SEC filings, many public companies do not. In the foreseeable future, however, it is expected that many more organisations will need to consider issues relating to climate change as part of their SEC disclosure process.
SEC guidance
In February, the SEC issued an interpretive release for the stated purpose of providing guidance to public companies regarding existing disclosure requirements as they apply to climate change matters.SEC chairman Mary Shapiro’s remarks accompanying the announcement of the release stressed that it was neither intended to create new requirements nor modify existing SEC disclosure rules or principles. Furthermore, she indicated that the SEC was not adopting any position on “whether the world’s climate is changing, at what pace it might be changing, or due to what causes”.
Nevertheless, the interpretative release notes that the SEC’s existing disclosure rules may require companies to include disclosure relating to climate change in their reports filed with the commission.
The release identifies a number of general topics under which disclosure regarding climate change may be triggered, according to the existing SEC rules highlighted in the release. These topics include the effects of existing and pending US laws and regulations, as well as international accords and treaties regarding climate change; including an assessment under Item 303 of Regulation S-K of the potential impact of pending legislation or regulation.
The indirect consequences of regulation or business trends, including legal, technological, political and scientific developments, were also highlighted as a key topic by the SEC.
These consequences include new opportunities or risks that may be created by climate change, such as declining demand for goods that produce significant greenhouse emissions or increasing demand for goods that result in lower emissions.
Furthermore, the actual and potential physical impact of climate change could trigger the need for fuller disclosure. The SEC indicates that these physical effects could include possible damage to properties or facilities by severe weather, financial or operational disruption to facilities by hurricanes or floods, and increasing insurance costs.
The interpretative release concluded by noting that the SEC and its Investor Advisory Committee (which was formed in June 2009 to advise the commission on matters of concern to investors in the securities markets) would continue to monitor the impact of the interpretive release on company filings, as part of the SEC’s ongoing disclosure review programme. The SEC will also hold a public roundtable on climate change disclosure this year.
The release expressly left open the possibility of further commission guidance or rule making relating to climate change disclosure.
Other disclosures
As the SEC’s recent interpretive release notes, many public companies currently provide information on their greenhouse gas emissions to the EPA and other environmental regulatory agencies. This has particularly been true since the implementation of California’s Greenhouse Gas Reporting Rule (for 2008 emissions) and the EPA’s Greenhouse Gas Reporting Rule (for emissions starting from the beginning of this year).Based on other recent EPA rules, such as the anticipated incorporation of underground coal-mining operations into its Greenhouse Gas Reporting Rule and the issuance of the EPA’s Stationary Source Tailoring Rule, it is expected that governmental reporting requirements will continue to increase significantly in the future, particularly for industrial manufacturers and energy firms, and possibly for a wide range of mining companies.
In addition to complying with governmental reporting requirements, a growing number of US public companies provide information voluntarily to non-governmental organisations on their current and projected greenhouse gas emissions, and their corporate strategies for reducing them.
For example, many companies provide such information in response to an annual questionnaire from the Carbon Disclosure Project, which solicits data on the reporting company’s annual greenhouse gas emissions, plans to reduce emissions, and greenhouse gas-related investment options. In 2009, more than 2,000 of the world’s largest corporations responded voluntarily to the CDP questionnaire, including 300 of the S&P 500 companies.
Next steps
In the past, public companies considering the possible disclosure of climate change-related information and risks have often concluded that disclosure was neither required nor appropriate. This was either because the impact of climate change, and related governmental action, was not material to their business or because the impact was too uncertain and speculative to permit meaningful disclosure to investors. In view of these recent developments relating to climate change disclosure, however, many public companies may find it difficult to continue to take these positions.Based on the recent interpretative guidance by the SEC, firms should consider a number of steps relating to the possible disclosure of climate change-related information and risks.
Companies need to determine the extent to which their board of directors and senior management are considering climate change as part of their strategic, business planning and risk management processes. If these issues begin to influence the company’s business strategy or decisions, they may, arguably, be considered to be material for disclosure purposes.
It may also be appropriate to consider including senior managers who are responsible for these issues in the disclosure committee that participates in the preparation and review of the company’s SEC reports; as well as working with senior executives, investor relations staff and others who interact regularly with investors, securities analysts, the media and the public to ensure they are aware of the disclosures (formal and informal) that the company has made with respect to climate change, and that these are consistent with their public statements.
It can be useful to determine whether the firm has prepared internal reports or studies, some of which may contain detailed cost projections and other quantitative information regarding the expected impact of climate change on the company. If so, it is important to consider whether the information available in those reports may affect the disclosure included in the company’s SEC reports, particularly with respect to discussions of regulatory matters, risk factors and “management’s discussion and analysis”.
Companies should also evaluate the informal disclosures regarding climate change that they may be making as part of media releases, speeches or other statements by senior executives, governmental lobbying efforts or information provided on the company’s website. It is important to consider whether these disclosures are consistent with the formal disclosures included in any SEC reports.
Similarly, companies can look at how they report on these issues in other venues, including reports and information provided to governmental and non-governmental entities, such as the Carbon Disclosure Project. This information is often publicly available, and may give rise to potential issues concerning selective or inconsistent disclosure.
Finally, it may also be useful to study the approach to disclosure being taken by other companies in the mining industry. A company may also take into account the positions of other stakeholders, including institutional investors, individual shareholders, labour organisations and industry groups of which the company may be a member, and determine whether they have taken a position with respect to climate change disclosure.
Considering these steps will at least allow mining companies to focus on the expected future impact of climate change on their business, and begin to develop appropriate investor disclosure practices with respect to risks.
Significant uncertainty remains with respect to understanding the future implications of climate change, and in determining the timing and scope of the expected government response. Given the increasing investor focus on this issue, and the likelihood of future governmental action effecting a large number of firms in a broad range of industries, it is appropriate for public companies to start considering these issues as part of their ongoing effort to evaluate and enhance their public disclosure process.
Potential requirements
The release identifies the potential requirements arising under five SEC disclosure rules:
- Item 101 of Regulation S-K
Related to the material effects of compliance with federal, state and local environmental laws and regulations, and the disclosure of material estimated capital expenditures for environmental control facilities; - Item 103 of Regulation S-K
Related to certain material, pending legal proceedings, including any proceedings ‘known to be contemplated’ by governmental authorities, including proceedings arising under the environmental laws if they meet certain materiality thresholds; - Item 303 of Regulation S-K
Related to ‘known trends, events, demands, commitments and uncertainties’ that are ‘reasonably likely’ to have a material impact on financial conditions or operating performance; - Item 503(c) of Regulation S-K
Related to the most significant risk factors faced by a company; and - Rule 408 under the Securities Act of 1933 & Rule 12b-20 under the Securities Exchange Act of 1934
These rules require disclosure of ‘such further material information, if any, as may be necessary to make the required statements in light of the circumstances under which they are made, not misleading’.
Craig Roeder, David Malliband and Steven Murawski are partners in the Chicago office of Baker & McKenzie LLP