Did you know your company may have a duty to disclose how climate change may impact your business?
A group of Crowell & Moring attorneys – James Chen, Bryan Brewer and Jessica Hall – recently released a Climate Change Client Alert regarding the issuance of climate disclosure guidance by the Securities and Exchange Commission (SEC). This alert has important implications for those companies required to make disclosures and may impact the green building industry as well.
"On January 27, 2010, the Securities and Exchange Commission ("SEC") approved, by a slight majority, the issuance of guidance on how existing public company-disclosure requirements may apply to climate change. A pre-publication copy of the guidance was made available on February 2, 2010 (see below). Unlike a law or rule promulgated pursuant to legal authority, the interpretive guidance is not legally binding. It is, nonetheless, significant as the SEC’s first express statement regarding how climate change issues may implicate companies’ disclosure requirements.
Existing disclosure rules cover a company’s risk factors, business description, legal proceedings, and management discussion and analysis. Companies must disclose to investors material information that may impact their business. Materiality is generally determined by reference to the "reasonable investor." The SEC has long acknowledged that environmental factors may trigger disclosure duties under certain circumstances. The issue of climate change was not specifically considered until 2007.
The SEC’s interpretive guidance indicates that climate change may trigger existing disclosure requirements for some companies. In assessing whether disclosure is required, companies should consider the following:
existing domestic laws and regulations relating to climate change, including the potential impact of pending laws and rules;
opportunities and risks arising from legal or technological aspects of climate change, including indirect impacts of regulation like decreased demand for carbon-intensive products;
potential positive and negative effects of international legal instruments governing climate change; and
actual and potential physical impacts of climate change on business operations.
Thus, under the SEC’s guidance, a company may have to consider the materiality and possible disclosure of impacts related to the Environmental Protection Agency’s mandatory greenhouse gas reporting rule, promulgated in 2009, as well as other pending Clean Air Act rule-makings on greenhouse gases. Companies may also have to consider the likelihood of enactment and impacts of comprehensive climate change legislation. In addition, companies may have to disclose risks related to the rise in private tort litigation involving greenhouse gas emitters. Finally, if international negotiations lead to a post-Kyoto Protocol climate treaty, companies may have to consider how the treaty would impact their businesses."
I am particularly interested in how "existing domestic laws and regulations relating to climate change" may trigger disclosure rules. For example, in cities like Washington, D.C., Austin, Texas and New York City, municipal governments are attempting to create a market for energy efficient buildings by requiring disclosure of building stock energy usage. If a major, publicly-traded real estate development company owns property with poor energy efficiency in one of these cities, could the developer be required to disclose this information?
