The SEC and Climate Disclosure: Part 2

Requiring disclosure of climate change matters when they will have a material effect on the company would ordinarily seem uncontroversial.  Yet the release drew two dissents, one from Commissioner Paredes and the other from Commissioner Casey.

Paredes objected to several things (including his belief there were more pressing priorities before the Commission and, as a result, "now is not the time for this agency to consider climate change disclosure.").  One of them was this statement in the release:

• 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.

He contended that the requirement would "foster confusion and uncertainty about a company's required disclosures'"  His main objection?  That "reputational damage . . .  can be quite speculative."  The result will encourage disclosures "that are unlikely to improve investor decision making and may actually distract investors from focusing on more important information."

The claim that disclosure can result in excessive amounts of information has been raised by Commissioner Paredes before.  See Statement by Commissioner Paredes at Open Meeting to Adopt Amendments Regarding Proxy Disclosure Enhancements, Dec. 16, 2009 ("Even as we add new disclosure requirements today, it is important to consider whether other mandated disclosures should be more narrowly focused or otherwise scaled back if they are no longer sufficiently useful to investor decision making").  Moreover, the risk that new requirements will result in boilerplate is always present. 

But the substance of the claim is misplaced.  Without the benefit of the entire release, there may be more to the statement than is in the remarks by Commissioner Paredes.  Yet it looks to be nothing more than an application of qualitative materiality.  Moreover, while the statement refers to reputational damage, it specifically indicates that this will only be important where it will have an adverse effect on business operations or finances.  In other words, this is about reputational harm that will hurt the bottom line.  

To the extent that this was the main objection (there was also one on the impact of disclosure relating the "physical effects of climate change"), it seems like a remarkably small issue that could have been readily clarified by the staff.  This suggests that in fact there were other motivations for opposing the guidance.  A hint of what that might have been appears in a later paragraph.  As Commissioner Paredes notes: 

•  Also problematic are the interpretive release's introductory and background discussions on climate change and its regulation. To me, the effect of the discussions is to find the Commission joining the ongoing debate over climate change by lending support to a particular view of climate change. Although the release does not expressly take sides, the release emphasizes the "concerns" and potential harms of climate change and discusses a range of regulatory and legislative developments, along with international efforts, aimed at regulating and otherwise remedying causes of climate change. . . . While the release stresses the risks of climate change and ongoing efforts to regulate greenhouse gas emissions in the U.S. and abroad, the release fails to recognize that the climate change debate remains unsettled and that many have questioned the appropriateness of the regulatory, legislative, and other initiatives aimed at reducing emissions that the release features. In short, I am troubled that the release does not strike a more neutral and balanced tone when it comes to climate change — an area far outside this agency's expertise.

Yet whatever the tone, disclosure apparently is limited to climate change matters that have a material effect on a company's business.  In other words, the SEC is not entering the debate on climate change as much as it is telling companies that material, quantifiable consequences of climate change must be disclosed.

Commissioner Paredes apparently views accurate disclosure as something that should be sidelined when the matter is controversial.  

Speech by SEC Commissioner: Statement Regarding Commission Guidance Regarding Disclosure Related to Climate Change by Commissioner Troy A. Paredes U.S. Securities and Exchange Commission Washington, D.C. January 27, 2010 Thank you, Chairman Schapiro. The Commission is considering an interpretive release, the stated purpose of which is to guide companies in complying with existing disclosure obligations under the federal securities laws as they apply to climate change. As the release accurately recites, a number of disclosure requirements have long related to environmental matters. Over time, companies have continued to expand their environmental disclosures, including with respect to climate change. Registrants increasingly have gone beyond SEC disclosure requirements by providing more information than the federal securities laws mandate in filings with this agency. The release highlights some of the voluntary disclosure initiatives that afford investors, as well as other stakeholders, additional climate change information. It is not objectionable to remind registrants of existing sources of potential disclosure obligations under the federal securities laws, such as certain Regulation S-K items, although I doubt that the formality of an interpretive release from the Commission is needed to reiterate what Regulation S-K items 101, 103, 303, and 503(c) already provide. Indeed, there are many publicly available analyses from law firms and other commentators explaining current disclosure requirements regarding climate change. The release, however, does more than recount key Regulation S-K items. Let me single out two aspects of the release's substantive guidance for applying Regulation S-K to climate change that I am uncomfortable with because the guidance is apt to muddy the waters. First, the interpretive release includes harm to a registrant's reputation among the "indirect risks" of climate change that may warrant disclosure. Specifically, the release provides: 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. Second, the release states that companies "whose businesses may be vulnerable to severe weather or climate related events should consider disclosing material risks of, or consequences from," the "physical effects of climate change, such as effects on the severity of weather (for example, floods or hurricanes), sea levels, the arability of farmland, and water availability and quality." The prospect that this guidance will in fact foster confusion and uncertainty about a company's required disclosures troubles me. What triggers a "reputational damage" or "physical effects" disclosure is far from certain, as is the scope of any such disclosure if and when required. More to the point, reputational damage and the impact on a company of the physical effects of climate change can be quite speculative. There is a notable risk that the interpretive release will encourage disclosures that are unlikely to improve investor decision making and may actually distract investors from focusing on more important information. Here, it is worth recalling that, in rejecting the view that a fact is "material" if an investor "might" find it important, Justice Marshall, writing for the Supreme Court in TSC Industries, warned that "management's fear of exposing itself to substantial liability may cause it simply to bury the shareholders in an avalanche of trivial information — a result that is hardly conducive to informed decisionmaking."1 Also problematic are the interpretive release's introductory and background discussions on climate change and its regulation. To me, the effect of the discussions is to find the Commission joining the ongoing debate over climate change by lending support to a particular view of climate change. Although the release does not expressly take sides, the release emphasizes the "concerns" and potential harms of climate change and discusses a range of regulatory and legislative developments, along with international efforts, aimed at regulating and otherwise remedying causes of climate change. In particular, the release highlights new EPA regulations, proposed "cap-and-trade" legislation, the Kyoto Protocol (which the U.S. has not ratified), the European Union Emissions Trading System, and recent discussions at the United Nations Climate Conference in Copenhagen. While the release stresses the risks of climate change and ongoing efforts to regulate greenhouse gas emissions in the U.S. and abroad, the release fails to recognize that the climate change debate remains unsettled and that many have questioned the appropriateness of the regulatory, legislative, and other initiatives aimed at reducing emissions that the release features. In short, I am troubled that the release does not strike a more neutral and balanced tone when it comes to climate change — an area far outside this agency's expertise.

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Greenhouse effect is the gradual warming of the air surrounding the earth as a result of heat being trapped by environmental pollution.