SEC Approval of Interpretive Guidance on Climate Change Disclosure Reinforces Importance of Greenhouse Gas Emission Reporting

The US Securities and Exchange Commission (SEC) on January 27, 2010, approved interpretive guidance on climate change reporting for publicly traded companies. The new guidance is intended to clarify the circumstances in which existing SEC regulations require companies to disclose climate change–related information that could have “material” financial impacts. The text of the guidance will be published soon in the Federal Register.

According to an SEC press release, the new interpretative guidance highlights the following areas where climate change may trigger disclosure:
• Impact of legislation and regulation
• Impact of international accords
• Indirect consequences of regulation or business trends
• Physical impacts of climate change.

Investors and environmental advocates in 2007 had urged the SEC to issue guidance on disclosure of climate-related impacts. Petitioners included pension funds, state treasurers, investor advocates and environmental groups, among others.

SEC chairman Mary Shapiro made clear in remarks at the hearing that adopted the new interpretative guidance that the SEC is not changing regulations related to disclosure of material information to investors. Rather, the new guidance will help companies interpret existing disclosure rules with respect to climate change–related financial impacts.

The SEC’s action should prompt more companies to collect, analyze and report on climate change information. Companies that do not do so face added risks of litigation or regulatory action if future developments show that management failed to disclose material financial impacts linked to climate change. Actions against companies have already occurred. In 2008, the New York state attorney general set a precedent when he negotiated an agreement with Xcel Energy to disclose climate change information after subpoenaing the firm for information related to the construction of a new coal-fired power plant.

In October 2009 the US Environmental Protection Agency issued a new regulation requiring approximately 10,000 US facilities to report their emissions of greenhouse gases, starting in January 2010. For affected companies that had not previously counted GHG emissions, the US EPA regulation imposes the requirement to do so. The facility-based regulation, however, does not require corporatewide accounting, and not every public company is covered by the regulation. Moreover, companies will have to analyze the data they collect in order to calculate potential financial impacts.

Companies that do not currently report GHG emissions information at the corporate level have several options with respect to standards. The most widely used corporate reporting standard in North America is the GHG Protocol, published by the World Business Council on Sustainable Development/World Resources Institute. The GHG Protocol formed the basis for the General Reporting Protocol of The Climate Registry, a non-profit organization that accepts voluntary GHG reports from organizations based in the USA and Canada. The Carbon Disclosure Project is another venue for companies to report GHG information. Finally, ISO 14064:2006 Part 1 offers a concise set of requirements for quantification and reporting of greenhouse gas emissions at the organizational level.

The SEC announcement puts into question the fate of an ASTM International standard that was developed to provide guidance on the same topic. According to Gayle Koch of The Brattle Group, technical contact for the recently balloted standard, if the proposed ASTM Guide for Financial Disclosure Attributed to Climate Change has been incorporated in the SEC document, there may be less reason to publish it. On the other hand, if the ASTM document adds significant value after taking into account the SEC interpretive guidance, ASTM is more likely to publish it and include in it a reference to the SEC guidance. The text of the SEC guidance is closely held, and not expected to be known until its publication in the Federal Register.

Climate change can have material financial impacts on companies. Where their magnitude can be estimated, they should be disclosed by companies regulated by the SEC. Privately held companies should also quantify these impacts for strategic planning purposes. Moreover, companies should consider information they may release voluntarily to greenhouse gas registries or to mechanisms such as the Carbon Disclosure Project when they are preparing regulatory filings to the SEC.

Companies that quantify their GHG emissions in accordance with one or more reporting protocols or standards should consider, as a matter of quality assurance/quality control, hiring a third party to verify their inventory reports. This is equally true whether the company is required to report its emissions to a state or federal regulatory body, or whether the company gathers the information for strategic planning and potential disclosure under applicable SEC regulations. Futurepast can perform this service as an internal audit or recommend qualified and accredited third-party verification bodies.

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