Transcript Has the Climate Changed for SEC Disclosures Regarding

Has the Climate Changed for SEC Disclosures
Regarding Environmental Matters?
Presented by:
Jane Whitt Sellers, Partner
Julianna Lowe, Associate
July 31, 2008
www.mcguirewoods.com
Scope of presentation
• Focus will be on current SEC disclosure requirements
applicable to public companies
• Not about mandatory GHG reporting that EPA is working
on under FY2008 appropriations bill or California
mandatory reporting
• Not about currently active voluntary registries or
sustainability reports
• Not about climate change itself (no offense to nonbelievers intended!)
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What might prompt a company to make
SEC disclosures to investors regarding
climate change or GHG emissions?
• Voluntary, Informal – Responding to requests by investors,
investment bankers and other constituents
• Shareholder proposals regarding sustainability reports
generally in form of recommendation to board of directors
• Formal – Companies must evaluate whether disclosure
regarding these matters is required, or prudent, under existing
general and environmental disclosure requirements
• Currently no specific SEC guidance regarding appropriate
climate change or GHG disclosure analysis
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What SEC rules might require disclosure
regarding climate change or GHG issues?
• Two primary contexts for SEC disclosure –
securities offerings and periodic reports
• Securities Act governs disclosure in offering
context; Exchange Act governs periodic reporting
• Both Acts link to a common set of specific
disclosure requirements found in Regulation S-K
• Note: Disclosure ≠ Substantive Requirement
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Most likely places for climate change or
GHG disclosures:
• Description of Business (Reg. S-K Item 101)
• Management’s Discussion and Analysis of Financial
Condition and Results of Operations (Reg. S-K Item 303)
• Risk Factors (Reg. S-K Item 503(c)) (and closely related,
cautionary language regarding forward-looking statements)
• Financial Statements – Footnotes regarding
commitments and contingencies (FASB Statement No. 5,
FIN 14, SOP 96-1, Statement 141R – fair value method)
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Description of Business (Reg. S-K Item 101)
• Material effects that compliance with
environmental laws and regulations have on
capital expenditures, earnings and competitive
position
• Material estimated environmental capital
expenditures for current year and the next year
(and additional periods if material)
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Management’s Discussion and Analysis
of Financial Condition and Results of
Operations (Reg. S-K Item 303)
• In addition to discussion and analysis of historical
financial information, a company is required to
discuss known trends, demands, commitments,
events or uncertainties that will, or are reasonably
likely to, materially affect liquidity, capital
resources, revenue or net income.
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MD&A - continued
• Where a trend, demand, commitment, event or
uncertainty is known, management must make two
assessments:
– Is the known trend, demand, commitment,
event or uncertainty reasonably likely to come
to fruition? If not, no disclosure is required.
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MD&A - continued
• If management cannot make that determination,
– It must evaluate objectively the consequences
of the known trend, demand, commitment,
event or uncertainty, on the assumption that it
will come to fruition.
– Disclosure is then required unless management
determines that a material effect on the
company's financial condition or results of
operations is not reasonably likely to occur.
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MD&A - continued
• Consider in context of climate change and GHG
emissions reporting, required reductions
– Science becoming more coalesced
– Kyoto and subsequent international efforts
– Mandatory GHG emissions registration and reduction
(direct and indirect) on the horizon
– Trading markets in allowances (CAIR ruling)
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MD&A - continued
• But the problem is – many elements are still
unknown and unknowable; regional differences
• Consensus today – cap and trade or carbon tax
likely – but different consequences of each
• Would we be engaging in premature release of
little more than informed speculation to fill a
perceived void?
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Risk Factors (Reg. S-K Item 503(c))
• Required to discuss the most significant factors that
make an investment in a company’s securities
speculative or risky
• Do not present risks that could apply to any issuer or
any offering
Example: Energy Co. A is subject to numerous environmental laws and
regulations that require significant capital expenditures, can increase
our cost of operations, and which may impact or limit our business
plans, or expose us to environmental liabilities.
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Also may consider whether climate change or
GHG issues would require disclosure under
Reg. S-K Item 102 (Properties) or Item 103
(Legal Proceedings)
• Due to the $100,000 dollar threshold related to
legal proceedings regarding environmental
matters, discussion of otherwise “immaterial”
environmental matters may none the less be
required.
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Forward-looking statement disclaimers
may also reference climate change or GHG
issues
• The issuer has no liability for forward-looking
statements in periodic reports that are
accompanied by meaningful cautionary statements
identifying important factors that could cause
actual results to differ from those anticipated
(Exchange Act, Section 21E)
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Yes, yes, but is there any specific SEC
guidance regarding climate change or
GHG disclosure issues?
NO………………
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NO -- continued
• No FAQs or other interpretive
pronouncements. Not even in the context of
speeches by SEC Commissioners/Staff.
• Climate change and GHG issues are not
being addressed in the comment letter
process.
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However, . . .
• The focus on this area has been intensifying
over the last 5-10 years – beginning with
environmental risk disclosure generally and
increasingly moving toward climate change
and GHG emissions.
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GAO Report regarding Environmental
Disclosure
• In 2002, GAO was asked to determine:
– Key stakeholders views on how well the SEC has
defined the requirements for environmental disclosure
(“Depends on who you ask.”)
– The extent to which companies are disclosing
environmental information in their filings with the SEC
(“It’s hard to tell.”)
– The adequacy of the SEC’s efforts to monitor and
enforce compliance with disclosure requirements (“It’s
hard to tell.”)
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GAO Report – continued
– What actions experts suggest for increasing and
improving environmental disclosure:
• Modify disclosure requirements and improve
guidance for reporting companies;
• Step up SEC monitoring and enforcement of
existing requirements; and
• Adopt non-regulatory approaches to
improving disclosure.
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GAO Report – continued
• GAO conclusions and recommendations:
“Without more compelling evidence that the
disclosure of environmental information is
inadequate, the need for changes to existing
disclosure requirements and guidance or
increased monitoring or enforcement by SEC is
unclear.”
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GAO Conclusions – continued
• SEC should take steps to ensure that information from
Staff examinations of corporate filings is electronically
sorted and tracked to help the Staff allocate oversight
resources and determine focus for additional guidance.
DONE (at least in part).
• SEC should create a publicly available searchable database
of its comment letters and company responses to those
letters.
DONE.
• SEC should work with EPA to explore opportunities to
take better advantage of EPA data relevant to
environmental disclosure.
?
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Coalition for Environmentally Responsible
Economies (CERES), and others – Petition
for Interpretive Guidance on Climate Risk
Disclosure, September 18, 2007
• Petitioned the SEC to issue guidance that climate
change disclosure is required under existing law
and regulations.
• The guidance should clarify that issuers must:
– Assess the climate change risks they face; and
– Disclose those risks if material.
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CERES Petition – continued
• The guidance should address the assessment
process and direct disclosure of the following
risks, if material:
– Physical risks associated with climate change;
– Financial risks associated with present or probable
regulation of greenhouse gas emissions; and
– Legal proceedings relating to climate change.
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CERES – Supplemental SEC filing,
June 12, 2008
• Reviews developments since the filing of the
Petition
– Legislative, regulatory and litigation developments re
climate change, GHG regulations, energy policy and
financial disclosures
– Important reports and studies indicating the need for
improved disclosure. (See Appendix 1 for links to
some of these reports.)
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Investigation by New York State
Attorney General (Andrew Cuomo)
• September 14, 2007, subpoenas were issued to five
energy companies
• The New York State Common Retirement Fund is a
“significant shareholder” of each company
• Raised concern that the companies have “failed to
disclose material information about the increased
climate risks [each company’s] business faces.”
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Investigation by New York AG – cont.
• “For example, any one of the several new or likely
regulatory initiatives for CO2 emissions from
power plants – including state carbon controls,
potential EPA regulations under the Clean Air
Act, or the enactment of federal global warming
legislation – would add significant cost to carbonintensive coal generation . . . .”
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Lieberman-Warner Climate Security Act
(S. 2191)
• December 5, 2007, Lieberman-Warner bill was
passed by the Senate Environment and Public
Works Committee.
• First climate change bill to pass out of committee.
• Current status – Placed on Senate Calendar of
Business (June 6, 2008) – effectively shelved until
2009 by procedural vote
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Lieberman-Warner Bill – cont.
• In addition to establishing a cap-and-trade
program, the bill would require SEC to:
– promulgate regulations requiring disclosures
related to global warming and
– clarify that
• global warming is a “known trend” and
• U.S. commitments to reduce emissions under United
Nations Framework Convention on Climate Change
are a “material effect”.
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Recent Legislative Action
• July 18, 2008: In the report accompanying the
Financial Services Appropriations bill for FY
2009, the Senate Appropriations Committee called
on the SEC to “give prompt consideration to [the
September 2007 CERES petition] and to provide
guidance on the appropriate disclosures of climate
risk.”
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Market activity – Carbon Principles
• February 2008 announcement by 3 large
investment banks – will apply new environmental
standards to evaluate power companies seeking
new generation financing
• Requirement to demonstrate continued economic
viability even if a cap system for GHG emissions
is imposed
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Carbon Principles - continued
• Lay out a portfolio approach to meeting domestic
demand through efficiency, renewable resources,
low-carbon distributed power and conventional
and advanced generation
• Practices emerging in financing power projects
that target quantification, reduction and mitigation
of climate change related risks
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Is SEC likely to respond? Short of
Congressional legislation, probably not.
• Disclosure guidance on specific environmental
issues has not been the SEC’s practice in the past,
e.g. disclosures related to contingent liability for
environmental remediation.
• Concern whether SEC would have the competence
to provide specific guidance regarding climate
change/GHG disclosures.
• Some cite Y2K example of what SEC can do.
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SEC Response? – continued
The SEC currently does not have an adequate
assessment framework or the scientific expertise
to make the determination that climate change
risks are material to a particular company and will
not push them to report specifically on climate
change in the coming years.
Former SEC Commissioner Roel Campos (March 30, 2007)
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So where does this leave us?
• Market, and other, pressures (and company
assessments) are having an impact.
• For example, Xcel Energy, likely seeking a
settlement with the NY Attorney General, made
specific disclosures regarding climate change risks
in its 2007 Form 10-K filed in February 2008 (see
Appendix).
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Congressional Testimony of Jeff Smith,
past ABA Environment Disclosure
Committee Chairman (October 2007)
• Voluntary disclosure increasing dramatically
• Best and most thorough reporting being done
outside the mandates of securities laws
• Would be a mistake to believe this voluntary
activity, no matter how sophisticated and wellintentioned, could become a permanent substitute
for mandatory reporting
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Congressional testimony – continued
• Voluntary reporting – no agreed format or objective, no
ready basis for comparison among themselves or against
vetted benchmarks
• SEC reporting – wide variation in depth, quality and
format
• Urges SEC to move with deliberate speed to reassert
gatekeeper role, but not over-react – do not want a flood of
defensive filings of immaterial and premature information
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So where does this leave us? (cont’d)
• While SEC guidance specifically addressing
climate change and GHG risks is unlikely, public
companies should assess whether these issues pose
material risks/opportunities that must be
disclosed under current rules and regulations.
• This assessment, and decisions regarding whether
disclosure is ultimately required, would not differ
significantly from the processes currently
employed for other types of environmental risks or
legal proceedings.
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Appendix 1: Links to Reports
• Carbon Disclosure Project Reports, focusing on climate-change
disclosure by world’s largest companies: http://www.cdproject.net
• Lehman Brothers Report—The Business of Climate Change II:
http://www.lehman.com/who/intcapital
• Ceres—Corporate Governance and Climate Change: The Banking
Sector:
http://www.ceres.org/NETCOMMUNITY/Document.Doc?id=269
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Appendix 2: Examples of climate
change/GHG disclosures by industry.
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