SEC Guidance on Disclosure Related to Climate Change

Overview, analysis and consequences for public companies

In February 2010, the SEC issued an interpretive release titled Commission Guidance Regarding Disclosure Related to Climate Change (Release Nos. 33-9106; 34-61469; FR-82) that provides guidance concerning disclosures related to the impact of climate change and related legislative and regulatory developments. The release provides assistance to public companies in satisfying existing disclosure responsibilities under federal securities laws. It does not, however, establish new disclosure obligations or amend existing rules.


The release is significant in that it forces management to examine the issue of climate change and assess the impact on their businesses—perhaps for the first time. The SEC has promised follow-up actions on the topic, and additional rules may be forthcoming. CPAs need to be aware of the underlying business risks associated with climate change, be mindful of evolving legislative and regulatory developments, and monitor future SEC actions in this area.


This article provides an overview of existing SEC disclosure requirements in “Regulation S-K” that are impacted by the release, and a discussion of particular risks that companies face from climate change legislation and regulatory developments (both domestic and international) that may trigger a disclosure obligation. Other company risks identified by the SEC, including the physical impacts and other “indirect consequences” from climate change, are also presented.



The release was effective Feb. 8, 2010, making it applicable to 10-K reports and pertinent SEC filings made after that date. This article includes sample disclosures from 10-K reports filed after the effective date to illustrate how registrants have responded to the new guidance.


The SEC’s uniform disclosure system includes requirements pertaining to nonfinancial statement disclosures in “Regulation S-K,” which is required in registration statements filed under the Securities Act of 1933 and in annual or other periodic reports filed under the Securities Exchange Act of 1934. (Foreign private issuers follow rules set forth in Form 20-F and other forms.) The release may impact four particular items within the disclosure requirements under Regulation S-K:


1. Item 101: Description of business. This item requires the registrant to provide a discussion about the historical development of the business, a narrative description of its business activities, and financial information about reportable segments. Discussion matters include principal products and services, markets, sources and availability of raw materials, competitive conditions, and other issues. Item 101 also requires two types of disclosures related to an entity’s compliance with environmental regulations. One pertains to “the material effects that compliance with Federal, State and local [environmental] provisions which have been enacted or adopted regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, may have upon the capital expenditures, earnings and competitive position of the registrant and its subsidiaries.” A second disclosure is required of material anticipated capital expenditures for environmental control facilities for the current year, succeeding year and future periods as deemed material by the company.


2. Item 103: Legal proceedings. Filers are required to describe any “material pending legal proceedings, other than ordinary routine litigation incidental to the business, to which the registrant or any of its subsidiaries is a party” including those unfavorable and favorable to the registrant. Similar information is required for any legal proceedings known to be contemplated by governmental authorities.


Specific materiality thresholds are provided to assess whether a disclosure is required under Item 103. For example, disclosure of legal proceedings is required if the amount of potential claims exceeds 10% of consolidated current assets. Moreover, legal proceedings related to environmental matters that involve a governmental authority must be disclosed if amounts exceed $100,000.


3. Item 303: Management’s discussion and analysis (MD&A). The MD&A should include broad-based disclosures necessary to permit investors to assess the financial condition, changes therein, results of operations, liquidity and capital resources of the company as viewed through the eyes of management. Emphasis is also placed on prospective disclosures. The release stresses that the MD&A should highlight “known trends, events, demands, commitments and uncertainties that are reasonably likely to have a material effect on financial condition or operating performance.”


The nature and extent of MD&A disclosures largely depends on management’s assessment of materiality. Identifying and assessing known material trends and uncertainties generally requires management to consider a substantial amount of available financial and nonfinancial information.


In the release, the SEC reminds registrants that determining the materiality of a known uncertainty (for example, pending climate change legislation or regulations) requires management to make two assessments. First, management must assess whether the pending legislation or regulation is reasonably likely to be enacted. If so, management must then evaluate whether it is reasonably likely to have a material effect on the company’s financial condition or results of operations. Accordingly, management is now in the tenuous position of assessing the likelihood that controversial climate change legislation now pending in Congress will be enacted and, if necessary, assessing the impact on the company.


4. Item 503(c): Risk factors. This item requires a discussion of the most significant factors that would make an investment in the registrant uniquely speculative or risky. Presently, Item 503(c) does not require a specific discussion of risk factors associated with climate change or environmental matters. The disclosure of risks should be concise, logically organized and represent those that are particular to the registrant. Boilerplate disclosures should be avoided.



Before determining whether a disclosure obligation exists, a registrant must consider the means by which climate change and related developments might impact the company’s business. Of course, the need for additional disclosure depends on the facts and circumstances of the registrant and the judgment of management. The release discusses four areas as illustrative of matters that registrants should consider and assess for additional disclosure. These include: (1) the impact of legislation and regulation, (2) effects of international accords, (3) indirect consequences of regulation or business trends, and (4) physical impacts of climate change. Each topic is discussed here along with sample disclosures from 10-K reports for selected companies included here and below (see "Web-Exclusive Disclosure Examples").


1. Impact of legislation and regulation. The release stresses that registrants must consider the impact of both existing and pending climate change legislation and regulation in determining their disclosure obligations. The SEC reminds registrants to be cognizant of both the negative and positive consequences to the company. Given the fluid regulatory environment with respect to climate change, management is urged to regularly examine its disclosure obligations in this area. The release identifies examples of pending legislation or regulation impacting a registrant, including:


  • Effects from purchases or sales of emissions allowances under a “cap and trade” program.
  • Expenditures for improvements to plant and equipment to reduce emissions to satisfy either regulatory requirements or commitments under a cap-and-trade program.
  • Positive or negative impacts to sales and cost of sales due to changes in the demand for the company’s goods and services.


Disclosures related to the impact of legislation and regulation can impact disclosures under one or more of the four disclosure items previously mentioned under Regulation S-K. As noted previously, Item 101 (Description of Business) requires disclosure of the estimated capital expenditures for environmental control facilities to lower greenhouse gas (GHG) emissions needed to comply with existing laws and regulations. Also, passage of cap-and-trade legislation or other regulations would likely trigger a disclosure if material.


2. International accords. In addition to U.S. laws and regulations, registrants must be cognizant of international agreements or treaties concerning climate change and disclose their impact on the company if material. For example, the Kyoto Protocol and possible follow-on treaties, the European Union Emissions Trading Scheme (EU-ETS), as well as other developments must be monitored for disclosure obligations. The release indicates that “the potential sources of disclosure obligations related to international accords are the same as those … for U.S. climate change regulation.” In many of the 10-Ks reviewed, disclosure concerning the impact of international accords and domestic activity were often combined. (For an example, see the disclosures for United States Steel Corp.; see also disclosures for Exxon Mobil Corp. with the online version of this article.)


3. Indirect consequences of regulation or business trends. Management may conclude that particular legal, technological or other developments related to climate change may lead to new opportunities or risks resulting in trends (both positive and negative) that can trigger additional disclosure. The release identifies examples of “indirect consequences or opportunities” that registrants should consider, including:


  • Lower (higher) demand for goods that produce higher (lower) levels of GHG emissions.
  • Increased competition to develop innovative new products.
  • Higher demand for energy derived from alternative sources.
  • Lower demand for services related to carbon-based sources of energy.


Depending on the facts and circumstances of the registrant, disclosure of risks for indirect consequences of regulation or business trends could trigger disclosure in Items 101, 303 or 503(c).


One particular indirect risk the SEC noted relates to the impact of climate change on a registrant’s reputation. More specifically, registrants in some industries may be more sensitive to public opinion than others, particularly with respect to the level of GHG emissions. “Reputational damage” could pose potential challenges to operations or financial condition.


4. Physical impacts of climate change. Citing the results of a 2007 U.S. Government Accountability Office (GAO) report (GAO-07-285,, the release identifies the severe consequences of climate change upon the environment (for example, weather patterns, rising sea levels, etc.) and states that “88% of all property losses paid by insurers between 1980 and 2005 were weather-related.” Potential risks to the company, its assets, supply chain, and other areas from the physical impact of severe weather include:


  • Property damage and business interruption for registrants located near coastlines.
  • Financial and operational impacts to major customers or suppliers.
  • Higher claims and liabilities for the insurance industry.
  • Lower agricultural production.
  • Higher insurance premiums or access to coverage for affected registrants.



The SEC promises to monitor how well registrants adhere to the release as part of its ongoing disclosure review program. A public round-table meeting and other actions are also expected to assess whether additional guidelines or rules are warranted. Given the fact that climate change has become a high-profile item on the SEC’s agenda, it is essential that public companies and CPAs have a heightened awareness of the key issues surrounding the topic. Management should step up efforts to monitor changes in the legislative and regulatory environment, install or upgrade data collection processes and procedures, regularly assess the impact on their businesses, and determine their disclosure obligations in this area. For reporting purposes, matters concerning climate change should also become an integral part of a company’s internal control policies and procedures to ensure awareness is established throughout the organization and that relevant information is available on a timely basis for disclosure purposes.



Disclosure Example: Bob Evans Farms Inc.

In its 10-K filing for the fiscal year ended April 30, 2010, the restaurant operator and food producer Bob Evans Farms Inc. added the following disclosure regarding existing and pending U.S. climate change legislation and noted the inability to estimate the ultimate cost of compliance:


Business—Government Regulation

U.S. federal, state and local laws and regulations are increasingly being enacted to address concerns about the effects that carbon dioxide emissions and other identified greenhouse gases (“GHG”) may have on the environment and climate worldwide. These effects are widely referred to as “Climate Change.” In the U.S., Climate Change legislation is currently pending in Congress and, if enacted, would limit GHG emissions from covered entities through a “cap and trade” system to reduce the quantity of national GHG emissions in accordance with established goals and time lines. One or more of our food processing facilities could be covered by such new legislation. There also has been recent regulatory activity relative to the regulation of GHG emissions by the U.S. Environmental Protection Agency (“EPA”) under the Clean Air Act, including the proposed mandatory reporting of greenhouse gases rule. Additionally, several states already have taken steps to require the reduction of GHGs by certain companies and public utilities, primarily through the planned development of GHG inventories and/or regional GHG cap and trade programs. GHG emissions occur at several points across our operations, including production, transportation and processing. Our compliance with any future legislation or regulation of GHGs, if it occurs, may result in increased compliance and operating costs. It is not, however, possible at this time to predict the structure or outcome of any future legislative or regulatory efforts to address such emissions or the eventual cost to us of compliance. Based on information currently available to us, we believe that compliance with these regulations will not have a material adverse effect on us.



Disclosure Example: U. S. Steel Corp.

Item 303 (MD&A) requires registrants to disclose how enacted and pending legislation is reasonably likely to have a material effect on the financial condition or results of operations. U.S. Steel Corp. updated its prior-year disclosure for legislative and regulatory activities that occurred during 2009 and included the following in its MD&A disclosure in its 2009 10-K:


MD&A—Environmental Matters, Litigation and Contingencies

Many nations, including all where we operate, have or are considering the regulation of carbon dioxide (CO2) emissions. Regulation of CO2 emissions is relevant to the steel industry and U.S. Steel. The integrated steel process involves a series of chemical reactions involving carbon that create CO2 emissions. This distinguishes integrated steel producers from mini-mills and many other industries where CO2 generation is generally linked to energy usage. The EU has established greenhouse gas regulations; Canada has published details of a regulatory framework for greenhouse gas emissions; and the United States House of Representatives has passed a bill, a bill has been introduced to the Senate and the U.S. Environmental Protection Agency (EPA) has classified CO2 as a harmful gas. Such regulations may entail substantial capital expenditures, restrict production, and raise the price of coal and other carbon-based energy sources.




Web-Exclusive Disclosure Examples


Impact of Legislation and Regulation

Disclosures related to the impact of legislation and regulation can affect disclosures under one or more of the four disclosure items previously mentioned under Regulation S-K . Item 101 (Description of Business) requires disclosure of the estimated capital expenditures for environmental control facilities to lower GHG emissions needed to comply with existing laws and regulations. Also, passage of “cap and trade” legislation or other regulations would likely trigger a disclosure if material to the registrant.


The uncertain impact of existing and pending regulations is illustrated in an expanded disclosure (over the prior year) in Constellation Energy Group Inc.’s 10-K for the year ended Dec. 31, 2009:

Business—Global Climate Change

There is increasing likelihood that greenhouse gas emissions regulation will occur at the international or federal level and/or continue to occur at the state level although considerable uncertainty remains as to the nature and timing of such regulation. Climate-related legislation is currently pending in the United States Congress. In September 2009, the Environmental Protection Agency issued an “endangerment and cause or contribute finding” for greenhouse gases under the Clean Air Act and proposed regulations to address greenhouse gas emissions. The proposed regulations would require large facilities that emit at least 25,000 tons of greenhouse gases a year, which would include many of our fossil fuel generating facilities, to obtain construction and operating permits covering these emissions. The proposed regulations could also eventually require installation of best available control technology for emissions control or reduction, although it is not possible to determine at this time the nature or extent of such controls.

Item 503(c) r equires a discussion of the most significant factors that would make an investment in the registrant be considered as speculative or risky. Citing risks from enacted and pending climate change legislation, Exxon Mobil Corp. added the following disclosure in its 10-K for the year ended Dec. 31, 2009:

Risk Factors Government and Political Factors

Climate change and greenhouse gas restrictions . Due to concern over the risk of climate change, a number of countries have adopted, or are considering the adoption of, regulatory frameworks to reduce greenhouse gas emissions. These include adoption of cap and trade regimes, carbon taxes, increased efficiency standards, and incentives or mandates for renewable energy. These requirements could make our products more expensive and reduce demand for hydrocarbons, as well as shifting hydrocarbon demand toward relatively lower-carbon sources such as natural gas. Current and pending greenhouse gas regulations may also increase our compliance costs, such as for monitoring or sequestering emissions.

Similarly, La-Z-Boy Inc. noted the difficulty of assessing the impact on its business of pending legislation regarding climate change and added the following disclosure to its 10-K for the fiscal year ended April 24, 2010:

Risk Factors

Climate change legislation has not yet been finalized or adopted, so any evaluation of its impact on our operations is speculative. We are a significant user of electricity, so any legislation that increases the operating costs of coal fired power plants will likely increase our operating expenses, although not disproportionately to our competitors or others in the industry. It is likely that cap and trade legislation regarding greenhouse gases will impose costs on carbon dioxide emissions from plants. Additionally, gasoline production will likely receive even greater cost allocations under cap and trade legislation. Increased costs associated with this type of legislation could have an adverse impact on our cost of raw materials or could result in increase costs associated with maintaining or updating our manufacturing facilities. New laws or regulations resulting in steep increases in the cost of fuel, or new technologies resulting in steep decreases in such costs, would affect our costs and the cost to our customers purchasing from us. If our costs increased, we might not always be able to pass along such increases to our customers due to competitive and marketing pressures, but we would expect our competitors to be similarly affected.

International Accords

For examples, see the disclosures for U.S. Steel Corp. and Exxon Mobil Corp.


Indirect Consequences of Regulation or Business Trends

In its 2010 10-K report, Constellation Energy Group Inc. updated its prior-year disclosure concerning new opportunities arising due to the evolving regulatory environment concerning climate change as follows:  

Business Global Climate Change

However, to the extent greenhouse gas emissions are regulated through a federal, mandatory cap and trade greenhouse gas emissions program, we believe our business could also benefit. Our generation fleet has an overall CO2 emission rate that is lower than the industry average with a substantial amount of the fleet’s output coming from nuclear and hydroelectric plants, which generate significantly lower CO2 emissions than fossil fuel plants. We are also at the forefront of the proposed development of new nuclear generation in the United States, which, if successful, would further lower our generation fleet’s overall CO2 emission rate. We also have experience trading in the markets for emissions allowances and renewable energy credits and our Customer Supply operation has expertise in providing renewable energy products and services to retail customers.

One particular indirect risk the SEC noted relates to the impact of climate change on a registrant’s reputation. More specifically, registrants in some industries may be more sensitive to public opinion than others, particularly with respect to the level of greenhouse gas emissions. “Reputational damage” could pose potential adverse consequences to operations or financial condition. This is noted by FedEx Corp. in an excerpt of a disclosure in its 10-K for the fiscal year ended May 31, 2010:

Risk Factors

It is reasonably possible, however, that it [GHG regulation] could impose material costs on us. Moreover, even without such regulation, increased awareness and any adverse publicity in the global marketplace about the GHGs emitted by companies in the airline and transportation industries could harm our reputation and reduce customer demand for our services, especially our air express services. Finally, given the broad and global scope of our operations and our susceptibility to global macro-economic trends, we are particularly vulnerable to the physical risks of climate change that could affect all of humankind, such as shifts in world ecosystems.

Physical Impacts of Climate Change

In its 10-K for the year ended Dec. 31, 2009, Consolidated Edison Inc. expanded its prior-year disclosure and discussed the physical risks due to weather and climate change as follows:


Business Environmental Matters

As indicated in 2007 by the Intergovernmental Panel on Climate Change, emissions of greenhouse gases, including carbon dioxide, are very likely changing the world’s climate. Climate change could affect customer demand for the Companies’ energy services. The effects of climate change might also include physical damage to the Companies’ facilities and disruption of their operations due to the impact of more extreme weather-related events.





  The SEC in February 2010 issued an interpretive release, Commission Guidance Regarding Disclosure Related to Climate Change . While the release contained guidance rather than new disclosure obligations or rule amendments, it is significant for public companies attempting to meet existing requirements and for all CPAs to be aware of as legislative and regulatory developments continue to unfold in this area.


  The release applies to 10-K reports and certain other SEC filings made after its Feb. 8, 2010, effective date. It could impact four disclosure areas: description of business; legal proceedings; MD&A; and risk factors.


  Risks that could trigger a disclosure obligation include: the impact of legislation and regulation; international environmental accords; indirect consequences of regulation or business trends; and physical effects of climate change.


James M. Fornaro ( is a member of the accounting faculty at SUNY–Old Westbury on Long Island, N.Y.


To comment on this article or to suggest an idea for another article, contact Matthew G. Lamoreaux, senior editor, at or 919-402-4435.





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