SEC Uses Disclosure Requirements to Promote Climate Change Agenda
Wednesday, February 17, 2010
As they say, "timing is everything," and, on February 2, 2010, the United States Securities and Exchange Commission ("SEC") showed some of the worst timing in regulatory history. In the face of the monumental collapse of the credibility of the scientific methods and conclusions underpinning the global climate change agenda, at the behest of United Nations-influenced global investor groups, the SEC published an interpretive release providing guidance to public companies regarding the SEC's existing disclosure requirements as they apply to climate change matters.
If followed, from this point forward, U.S. public companies will have to play an expensive, perhaps financially debilitating, guessing game as to the existence of global climate change; the possible physical, legal, regulatory, and financial effects of climate change on their business operations; and the nature and scope of the disclosure of those possible effects that will be expected or required by investors and the SEC.
The UN has played an influential role in corralling investor groups to pressure companies and government regulatory agencies to adopt and implement disclosure requirements that institutionalize global climate change as a consideration of business operations. In early 2005 the UN Secretary-General invited a group of the world's largest institutional investors to join a process to develop the Principles for Responsible Investment ("PRI"). Individuals representing 20 institutional investors from 12 countries agreed to participate in the investor group. The investor group was supported by a 70-person multi-stakeholder group of experts from the investment industry, intergovernmental and governmental organizations, civil society, and academia. The PRI emerged as a result of meetings held in 2005 and 2006. The United Nations Environmental Programme Finance Initiative ("UNEPFI") and the UN Global Compact coordinated the PRI development process and the UN serves as the secretariat for implementation of the PRI.
The PRI provide the UN and investment professionals with an opportunity to influence environmental, social and corporate governance ("ESG") issues that can affect the performance of investment portfolios. There are three main categories of entities that are eligible to sign the PRI, including asset owners, investment managers, and professional service partners. To date, there are 693 signatories to the PRI who have subscribed to its six principles.
Pursuant to PRI #3, signatories agree that they "will seek appropriate disclosure on ESG issues by the entities in which we invest." Possible actions under PRI #3 include:
· Asking for standardized reporting on ESG issues (using tools such as the Global Reporting Initiative)
· Asking for ESG issues to be integrated within annual financial reports
· Asking for information from companies regarding adoption of/adherence to relevant norms, standards, codes of conduct or international initiatives (such as the UN Global Compact)
· Supporting shareholder initiatives and resolutions promoting ESG disclosure
PRI #3 is a valuable tool in the UN's quest for the global governance of environmental, social, and corporate governance issues. Most recently, in the run-up to the December 2009 Climate Change Conference in Copenhagen, Denmark, the UN used PRI #3 to articulate the need for investors to pressure companies to disclose how climate change might impact their business operations and outcomes. In 2009, as part of their Caring for Climate Series, the UNEPFI, UN Global Compact, and PRI published a 21-page paper titled: "Investor leadership on climate change: An analysis of the investment community's role on climate change, and snapshot of recent investor activity." In the report, the three UN agencies encourage investor groups to focus on four broad areas relating to climate change:
· Increased allocation of assets to climate change mitigation and adaptation projects
· Leadership in building climate change into investment processes and pricing climate risk
· Shareholder leadership of corporate climate change activity
· Leadership in the climate change policy process and institution building
In connection with the last two focus areas, the Climate Disclosure Standards Board, formed at the 2007 annual meeting of the World Economic Forum, has been working to develop a globally accepted framework, based on existing standards, for corporate reporting on climate change. Additionally, at a meeting at the Investor Summit on Climate Risk, held on January 14, 2010 at the United Nations headquarters in New York, a group including the Investor Network on Climate Risk, the Institutional Investors Group on Climate Change, Investor Group on Climate Change, and the UNEPFI issued a joint statement calling on "national regulators worldwide, including the U.S. Securities and Exchange Commission, to require companies to disclose to their investors material climate-related risks and the programs in place to manage those risks."
Less than one month later, the SEC published its interpretative release providing guidance to public companies regarding the SEC's existing disclosure requirements as they apply to climate change matters.
In the Interpretive Release, the SEC sets forth the most pertinent non-financial statement disclosure rules that may require disclosure related to climate change and discusses their application to disclosure of certain specific climate change-related matters. The following synopsis of the SEC's analysis exhibits the comprehensive, ambiguous, and potentially economically devastating nature of the climate change-related disclosure requirements with which SEC-registered public companies will have to comply.
1. Description of business. Item 101 of Regulation S-K requires a registrant to describe its business and that of its subsidiaries, including disclosure about its form of organization, principal products and services, major customers, and competitive conditions. With respect to existing federal, state and local provisions which relate to greenhouse gas emissions, Item 101 requires disclosure of any material estimated capital expenditures for environmental control facilities for the remainder of a registrant's current fiscal year and its succeeding fiscal year and for such further periods as the registrant may deem material.
2. Legal proceedings. Item 103 of Regulation S-K requires a registrant to briefly describe any material pending legal proceeding to which it or any of its subsidiaries is a party. A registrant also must describe material pending legal actions in which its property is the subject of the litigation.
3. Management's discussion and analysis. Item 303 of Regulation S-K requires disclosure known as the Management's Discussion and Analysis of Financial Condition and Results of Operations, or MD&A. Item 303 requires registrants to assess whether any enacted climate change legislation or regulation is reasonably likely to have a material effect on the registrant's financial condition or results of operation.
4. Risk factors. Item 503(c) of Regulation S-K requires a registrant to provide where appropriate, under the heading "Risk Factors," a discussion of the most significant factors that make an investment in the registrant speculative or risky. Depending on a registrant's particular circumstances, Item 503(c) may require risk factor disclosure regarding existing or pending legislation or regulation that relates to climate change.
5. International accords. In the context of their U.S. disclosure requirements, registrants also should consider, and disclose when material, the impact on their business 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.
6. Indirect consequences of regulations and business trends. Legal, technological, political and scientific developments regarding climate change may create new opportunities or risks for registrants. These developments may create demand for new products or services, or decrease demand for existing products or services. Registrants should consider their own particular facts and circumstances in evaluating the materiality of these opportunities and obligations.
7. Physical impacts of climate change. Significant 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, have the potential to affect a registrant's operations and results. In their publicly filed disclosure documents, registrants whose businesses may be vulnerable to severe weather or climate related events should consider disclosing material risks of, or consequences from, such events.
Thus, the UN and investor groups who are invested in the scientifically suspect and wealth transformational global climate change agenda have succeeded in convincing the SEC to adopt and implement ambiguous disclosure requirements the scope and effects of which are beyond realistic comprehension or measurement.
Jim Kelly is the President of Solidarity Center for Law and Justice, P.C., a public interest civil and human rights law firm based in Atlanta, Georgia. The opinions expressed herein are his own.
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