Preparing Your Form 10-K? Here Are Some Action Items To Comply With New SEC Climate Change Disclosure Guidance

SEC Issues Interpretive Guidance on Disclosure Related to Climate Change

At a January 27 open meeting, the Securities and Exchange Commission (SEC), by a 3-2 vote, approved guidance on disclosure related to the effects on public companies of climate change and regulation concerning climate change.

On February 2, the SEC issued its formal interpretive release on the disclosure guidance, which was effective immediately. Thus, companies preparing their annual Form 10-K reports should consider the new guidance in evaluating their disclosures in response to the following Items of Regulation S-K:

Item 101—requires a registrant to describe its business, which could include disclosure of material estimated capital expenditures for environmental control facilities or changes in business practices necessary to comply with applicable climate change regulations of federal, state, local and foreign government agencies. Item 103—requires disclosure of any material legal proceedings or similar actions contemplated by any governmental authority, which could include suits arising out of climate related issues. Item 503(c)—requires disclosure of the registrant's most significant risk factors, which could include disclosure of existing or pending regulation that relates to climate change or perceived risk associated with reputational damage or physical changes. Item 303—requires disclosure in Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) of a known uncertainty, such as the impact of pending climate change legislation or regulations, under certain circumstances. The registrant must determine first whether the pending legislation or regulation is likely and, if the registrant concludes it is likely, whether such legislation or regulation, if enacted, is likely to have a material effect on the registrant. The SEC's guidance points out that companies should already be considering issues relating to climate change as part of their required disclosures in response to these items. The SEC's guidance also noted that disclosures should consider the potential indirect consequences of regulation or business trends related to climate change. The SEC's guidance does not amend or expand existing disclosure requirements or change any materiality thresholds.

In particular, the guidance seeks to clarify the responsibility of companies to disclose, where material:

the direct and indirect effects on a registrant's business...