SEC Interpretive Guidance for Climate-Related Disclosures
| Author | Nickolas M. Boecher |
| Position | J.D. Candidate, May 2012, at American University Washington College of Law |
| Pages | 43-43 |
43 SUSTAINABLE DEVELOPMENT LAW & POLICY
On January 27, 2010, the Securities and Exchange Com-
mission (“SEC”) provided public companies with inter-
pretive guidance for climate change related disclosure
requirements.1 In light of recent legislation and investor demand,2
the SEC acted prudently because the interpretive guidance will
probably encourage more complete disclosure of the risks and
opportunities faced by publicly traded businesses. In turn, increased
disclosure should foster greater transparency, provide incentive for
cleaner technologies,3 and facilitate dialogue concerning the effects
of climate change on the business world.4
Established disclosure requirements oblige publicly traded
companies to report the reasonably likely material costs of comply-
ing with environmental statutes and regulations.5 The newly issued
interpretative guidance highlights four areas where climate change
may trigger disclosure requirements: Legislation and Regulation;
International Accords; Indirect Consequences of Regulation or
Business Trends; and Physical Impacts of Climate Change.6 The
interpretive guidance does not create new legal requirements or
change established ones, but rather it clarifies what public compa-
nies need to disclose.7
The release of the interpretive guidance has received criticism
from within the SEC.8 One commissioner has argued that the phys-
ical risks of climate change are not relevant for disclosure because
they are not reasonably foreseeable and often only occur over the
course of decades or centuries.9 She has also pointed out that cli-
mate change concerns are outside the expertise of the SEC, which
was established to ensure investor protection.10
Investors have submitted reports suggesting that current cli-
mate-related disclosure is insufficient.11 A 2008 report, submitted
by an institutional investor, surveyed over six thousand annual fil-
ings by Standard & Poor’s 500 companies and found that 76.3% of
2008 filings failed to mention climate change.12 In January 2010,
the world’s largest investors, holding over thirteen trillion dollars
in assets, released a statement demanding action by world leaders
in regard to climate change.13 Among their demands was a request
that the SEC require greater climate-related disclosure.14
In addition, numerous examples, both domestic and interna-
tional, suggest a changing legislative and regulatory space requir-
ing more complete disclosure.15 Recent requirements from the
Environmental Protection Agency as well as legislation in state
and local governments regulating greenhouse gas emissions con-
stitute active legislation that may require disclosure.16 Additionally,
Congress is considering a national cap-and-trade system for the
regulation of emissions.17 Furthermore, the Kyoto Protocol and the
related European Union Emissions Trading System, which many
SEC registrants operating in international business must follow,
also may have material effect.18
Sec inteRpRetive guiDance foR climate-
RelateD DiScloSuReS
By Nickolas M. Boecher*
*Nickolas M. Boeche r is a J.D. Candi date, May 2012, at American University
Washington College of Law.
Commentators have suggested that legal problems could arise
if disclosure requirements are extended.19 Hostile shareholders
could file frivolous lawsuits by taking advantage of imperious dis-
closure requirements.20 Additionally, businesses may have trouble
accurately disclosing the outcome of pending litigation resulting
from climate change.21 Legal disclosure requirements could also
weaken legal positions in pending litigation, undermining the attor-
ney-client privilege and the work product doctrine.22
By limiting itself to providing interpretive guidance on cli-
mate change disclosure, the SEC has likely avoided these types of
legal problems. SEC Rule 10b-5 permits individual shareholders
an action against companies failing to make required disclosures.23
Rule 10b-5 actions provide companies an incentive to comply with
disclosure requirements and to reduce activity that would be unfa-
vorable to share value if publicly disclosed.24 Successful 10b-5
actions require a duty to disclose, something which the SEC has
never expressly required for environmental issues.25 Thus, while
the interpretive guidance provides some further basis for insuffi-
cient disclosure arguments under rule 10b-5, the fact that it does not
create an express duty to disclose should work to limit the number
of frivolous lawsuits.26 Additionally, the interpretive guidance does
not require detailed reporting of pending litigation.27 Moreover, as
a policy matter, the interpretive guidance probably will not be inter-
preted as obliging companies to compromise pending litigation by
disclosing pertinent information.
The SEC acted evenhandedly in its release of the interpretive
guidance. Although companies may have difficulty in predicting
the physical effects of climate change,28 legislative, regulatory, and
investment trends suggest a need for more complete disclosure.29
The interpretive guidance suggests that the SEC will be more likely
to enforce disclosure on climate-related issues than it has in the
past.30 However, by stopping short of creating an express duty to
disclose, the SEC has limited potential abuse of Rule 10b-5 litiga-
tion.31 Increased disclosure can provide more information to inves-
tors and also create an incentive for companies to invest in cleaner
technology as an alternative to disclosing damaging information.32
Increased disclosure might also provide legislators with a feedback
mechanism for evaluating the effects of climate change legislation.
The new interpretive guidance should help stream the flow of infor-
mation concerning climate-related matters and facilitate ongoing
dialogue in this area of increasing attention.33
Endnotes: SEC Interpretive Guidance for Climate-Related
Disclosures continued on page 62
