SEC Disclosure Rules for Climate Change May Be on Horizon

By Theodore A. Keys, Esq.  and Gina M. Schilmoeller, Esq. Keyes is special counsel and Schillmoeller is an associate at Schulte Roth & Zabel LLP, New York

Two years ago, the U.S. Supreme Court issued the much anticipated Massachusetts v. Environmental Protection Agency decision
and provided some clarity as to the federal government's authority
to regulate greenhouse gas (GHG) emissions under the
Clean Air Act (CAA).  Although the facts of Massachusetts
v. EPA
were limited to tailpipe GHG emissions, commentators
predicted that this decision would spawn a wave of legislation and
regulations directed at controlling GHG emissions and addressing climate
change issues.  First, commentators expected that regulations imposing
GHG disclosure requirements would be issued to provide regulators,
industry, and the public with a more complete picture of the nation's
reliance on fossil fuels and GHG emission levels.

Over the next two years, while several GHG bills failed to progress in Congress, the Environmental Protection Agency began to address climate change by issuing several proposed rules addressing GHG disclosures and emissions.  In September, EPA finalized a mandatory GHG emission disclosure rule for large sources. More recently, the EPA announced a proposal to regulate large sources of GHG by imposing permit requirements under the CAA. Beyond the EPA's GHG rules, however, predicting the scope of the emerging federal and/or state disclosure programs relating to GHG emissions and climate change risks still requires quite a bit of speculation.

Notably, the Securities and Exchange Commission has remained silent regarding disclosure requirements relating to climate change risk and GHG emissions.  However, the EPA's actions following
Massachusetts v. EPA, the growing body of scientific evidence
regarding global warming, rising political pressure for GHG regulation
and recent proposals for federal governance regarding GHG emissions
and climate change risk disclosures all suggest that new disclosure
rules are indeed on the horizon. 

Despite public companies' and investors' requests, the SEC has not issued formal rules or guidelines regarding GHG and climate change risk disclosure requirements. However, both Elisse Walter and Kathleen Casey have said the SEC is taking a ``serious
look'' at issues related to the impact of climate change on business

While companies wait for guidance, there remains considerable uncertainty over the appropriate scope of climate change related disclosure under the existing federal regulations.  The existing SEC disclosure requirements for domestic public companies are arguably broad enough to require disclosure of ``material''
risks posed by GHG emissions and climate change issues.  However,
absent guidance from the SEC, public filers are left with the difficult
task of determining at what point the mix of their business operations,
proposed federal oversight and scientific evidence of global warming
combine to create a ''material'' risk that management is
required to disclose.

In light of uncertainties regarding SEC disclosure requirements, the likelihood of additional GHG regulations and the perceived market benefits of disclosure, several independent organizations have developed voluntary climate change risk disclosure databases, which have become increasingly popular.  The National Association of Insurance Commissioners has gone a step further and passed a model rule mandating climate change risk disclosures for large insurance companies.  These voluntary disclosure databases and the NAIC model rule appear to be responses to the private sector's increasing demand for information regarding GHG emissions, projections of potential capital expenditures associated with impending GHG emission regulations and preparation for the coming climate change disclosure rules.  The voluntary disclosure surveys and the NAIC model rule questions may also provide some guidance as to the type of climate change related information that public companies may soon be required to disclose. 

For further information on this topic, please see the remainder of this article in Vol. 5, No. 25, Dec. 11, 2009, of Accounting Policy & Practice Report.