SEC Comes Clean on Climate Disclosures

The regulator is preparing to release guidance on how companies should reveal their climate-change risks.

New guidance from the Securities and Exchange Commission will prompt companies to reexamine how they explain the effects of climate change on their business in regulatory filings. The clarification from the regulator arrives just as companies with a calendar year-end are putting together their 10-Ks.

Investor groups have been critical of companies for their lack of candor about climate-change risk, and of the SEC for allowing them to get away with it. “A lot of investors think companies are not disclosing their climate-change risk adequately, and they are looking to the SEC to push companies to do that,” says Betty Moy Huber, counsel in Davis Polk & Wardell’s environmental practice group.

On Wednesday the commissioners voted to publish an interpretative release that will give companies tips on the issues they should consider when putting together climate-change-related disclosures. The document has not yet been made public, but it is expected to be released soon.

The SEC has been pressured to address the interpretation of its rules relating to climate change since 2007, when a coalition of state governments, institutional investors, and environmental groups petitioned the regulator to issue guidance on disclosing climate risk. Investors gained more traction on the issue when Mary Schapiro took over as SEC chairman a year ago, says Jim Coburn, senior manager of investor programs for environmental-advocacy group Ceres. “The new SEC leadership has been very interested in protecting investors and giving them better information,” he says.

Only 17% of companies made any reference to climate change or greenhouse-gas emissions in their annual report filed in 2009, according to a review of about 400 companies by law firm McGuireWoods. To be sure, not every company has material climate-change risk to disclose.

The problem may not be so much that companies are skirting the rules, but that they haven’t received a sufficient nudge to make proper disclosure. By publishing new guidance, “the SEC is effectively saying, ‘We really think you should think long and hard about whether or not greenhouse emissions and climate change are material to your shareholders,’” says Karl Strait, a partner at McGuireWoods.

Strait predicts his firm’s next study of climate-change disclosures will see a higher percentage of companies providing such information in 2010. Indeed, with new and proposed federal and state regulations regarding climate change making their way through the system, companies may have more pressing reasons to boost their disclosures than a clarification from the SEC. Among them are regulations from the Environmental Protection Agency requiring companies to report their greenhouse-gas emissions starting this year.

In addition, a recent settlement with the New York attorney general that obliges Xcel Energy and Dynegy to expand on their climate-change risks in their SEC filings may lead to other companies revisiting their own disclosures, or using the settlement as a checklist for the kinds of information they need to consider when putting together their 10-Ks.

Investors are hoping the SEC will also require companies to explain the process for how they determine the materiality of their climate-change risks. Currently, because of a lack of guidance from the regulator, disclosures have been inconsistent among companies in the same industry, says Coburn. “It’s hard to compare different companies and understand the risks they face and their strategies for responding to climate change,” he says.

 

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