SEC Mandates Climate Change Disclosures - And Clairvoyance

This “guidance” document impacts all businesses subject to SEC jurisdiction. It is sweeping, expansive and, unfortunately, fails to set realistic limits on the scope of its requirements. As a result, all regulated entities, and their officers and directors are placed in difficult circumstances. They now have a heavy burden of compliance and disclosure, and they face a risk of SEC enforcement, as well as civil and criminal liability if the disclosures prove inadequate or misleading.

Anyone in a position to advise public companies, their officers, and/or directors should study this document. Its vagaries are vexing – and the risks and responsibilities it imposes are all too real. Some of the examples below are illustrative:

Evaluating pending legislation by presuming it will be enacted (p. 23)

“First, management must evaluate whether the pending [climate change] legislation is reasonably likely to be enacted. Unless management determines that it is not reasonably likely to be enacted, it must proceed on the assumption that the legislation or regulation will be enacted. Second, management must determine whether the legislation or regulation, if enacted, is reasonably likely to have a material impact on the registrant, its financial condition or results of its operations. Unless management determines that a material effect is not reasonably likely, MD&A disclosure is required.”

Evaluating and monitoring risks posed by international treaty negotiations, e.g., Copenhagen (p. 24)

“Registrants should consider, and disclose when material, the impact on their businesses of treaties or international accords relating to climate change . . . Registrants whose businesses are reasonably likely to be affected by such agreements should monitor the progress of any potential agreements and consider the possible impact in satisfying their disclosure obligations based on the MD&A and materiality principles previously outlined.”

Disclosing changes in strategy to take advantage of beneficial climate change investments (p. 25)

“For example, a registrant that plans to reposition itself or take advantage of potential opportunities [associated with climate change], such as through material acquisitions of plants or equipment, may be required by Item 101(a)(1) to disclose this shift in plan of operation.”

Disclosing “reputational” risks caused by adverse public perception of available emissions data (p.26)

“Another example of a potential indirect risk from climate change that would need to be considered for risk factor disclosure is the impact on a registrant’s reputation. Depending on the nature of a registrant’s business and its sensitivity to public opinion, a registrant may have to consider whether the public’s perception of any publicly available data relating to its greenhouse gas emissions could expose it to potential adverse consequences to its business operations or financial condition resulting from reputational damage”

Note that this is not a new rulemaking. As a result, there is very little chance of any successful judicial challenge. The SEC presumably crafted these requirements as a “guidance” document to avoid being sued to abrogate them.

To say the least, compliance with these requirements will be difficult.

For example, forecasting the passage of US climate change legislation a highly speculative exercise – and the failure of the Copenhagen climate change conference places companies in the unenviable position of “monitoring” the progress and predicting the success of an extraordinarily complex international process.

The release’s requirements regarding “reputation” risks associated with emissions are extraordinarily vague. Is a company now required to track “public perception” of its operations and disclose how that “perception” might adversely affect its “reputation?” What objective criteria can be applied to evaluate public perception? At best, it seems that the SEC has enshrined the use of polling and focus groups to determine financial risks. At worst, the Commission (or litigious investors) may retrospectively determine that a company has inadequately evaluated risks to its reputation – thereby exposing management to liability for its lack of clairvoyance.

Trial lawyers specializing in securities litigation should find these vagaries reassuring, but business interests now face yet another predatory wave of climate change litigation. Given the resuscitation of common law public nuisance litigation, plaintiffs’ lawyers are now armed with a “double-edged sword” to wield against business interests. They will undoubtedly use both edges to cut wide swaths toward corporate coffers.