Part 2: U.S. SEC Guidance for Financial Disclosures on Climate Change

Apr 20th, 2010 | By | Category: Climate Change, Environmental Management

Part 2 of 2

Detailed Analysis

This is the second in a three-part series on the U.S. Securities and Exchange Commission (SEC) “Commission Guidance on Disclosures Related to Climate Change” (“SEC Guidance”) published in the February 8, 2010 Federal Register.  This part examines the guidance in detail.  Part 1 covers the basics of financial and nonfinancial reporting and disclosures while Part 3 provides advice on how to implement the SEC Guidance. 

SEC Regulation S-K

Regulation S-K is the SEC’s list of disclosure items.  It applies to annual and other reports, going-private transactions, proxy and other information statements, and others. 

Item 101 specifies that companies include a description of business and subsidiaries.  S-K Item 101 includes certain costs of complying with environmental laws, saying, in part:   “…material effects that compliance with… provisions which have been enacted or adopted regulating the discharge of materials into the environment, or relating to protection of the environment, may have upon the capital expenditures, earnings and competitive position….  [the company] shall disclose any material estimated capital expenditures for environmental control facilities for the remainder of its current fiscal year and succeeding fiscal year and for such further periods as the registrant may deem material.” [Italics added by author.] 

Note that this item applies to provisions that have been enacted or adopted; it does not apply to bills that have been introduced in the U.S. Congress, proposals in committee, suggestions, trends, or likely events.  It also applies to material effects the requirement could have on competitive position or capital expenditures. 

To appreciate the types of costs that could be incurred, one can consider the range of activities companies are already doing to reduce GHG emissions: 

  • Purchasing energy-efficient equipment;
  • Purchasing offsets;
  • Investing in carbon capture technologies;
  • Weatherizing facilities; and
  • Reducing business travel. 

 Are these costs material to a company’s financial performance?  Or, more appropriately, if Congress passed a climate change bill, would the costs imposed be material?  

Regulation S-K, Item 101 also addresses legal proceedings.  Companies must disclose information involving material pending legal actions.  Three criteria for disclosure of legal proceedings are provided:

  • Material to business or financial condition;
  • The claim for damages or sanctions is greater than 10% of current assets (consolidated); and
  • A regulatory agency, through enforcement, imposes fines or penalties of USD 100,000 or more. 

In all of the guidance for financial disclosures, this is the only section that applies a specific dollar value (USD 100,000).  It applies only to enforcement by a regulatory agency.  Even so, companies may evaluate several factors in making disclosures under this provision.  Agencies and companies settle upon a penalty after a lengthy process:  inspection, notice of violation, citation, proposed penalty, settlement negotiations, etc.  If an agency has proposed a penalty of USD 150,000, but the company has experience in negotiating and reducing penalties by half – should they disclose?  What if the company is subject to a claim from another company (not an agency), and the amount is over USD 1 million?  What if this litigation is to recover costs imposed by an agency, and the companies agreed to share costs but differ on contract terms?   

Regulation S-K requires companies to discuss risk factors – the most significant factors that make an investment speculative or risky.   S-K sets the bar fairly high, cautioning that “registrants should not present risks that could apply to any issuer or any offering.…” 

Management Discussion and Analysis

Regulation S-K, Item 303 addresses Management Discussion and Analysis (MD&A) of financial condition and results of operations.  MD&A should provide narrative explanation to enable the investor “to see… through the eyes of management,” so readers have context, and can understand the quality of, potential variability of earnings and cash flow (e.g., is past performance indicative of future?).  In MD&A,  “registrants must identify and disclose known trends, events, demands, commitments and uncertainties that are reasonably likely to have a material effect on financial condition or operating performance.”   Registrants drafting MD&A disclosure should focus on material information and eliminate immaterial information that does not promote understanding of the registrants’ financial condition, liquidity and capital resources, changes in financial condition, and results of operations.   The themes of known to registrant and materiality continue throughout the Guidance. 

MD&A has been the subject of interpretation before; the SEC references a 1989 release, saying that when a trend, demand, commitment, event, or uncertainty is known, “management must make two assessments:  [1] is the trend, commitment, event, or uncertainty likely to come to fruition?  If management determines that it is not reasonably likely to occur, no disclosure is required….  [2] Otherwise management … must evaluate objectively the consequences… on the assumption it will come to fruition.  Disclosure is then required unless management determines that a material effect on [its] financial condition or results of operations is not reasonably likely to occur. Registrants should address, when material, the difficulties involved in assessing the effect of the amount and timing of uncertain events, and provide an indication of time periods in which resolution of uncertainties is anticipated.”   

This guidance sounds rather circular.  The first hurdle is the certainty of occurrence; the Guidance provides examples of what the “occurrence” could be: 

  • Impact of legislation and regulations;
  • Negative consequences and opportunities;
  • International accords;
  • Indirect consequences of regulations or trends; and
  • Physical impacts of climate change. 

The second hurdle is the materiality of the effects, a recurring theme.   The Guidance notes, however, that “while these materiality determinations may limit what is actually disclosed, they should not limit the information that management considers in making its determinations….  Registrants are expected to consider all relevant information even if that information is not required to be disclosed, and, as with any other disclosure judgments, they should consider whether they have sufficient disclosure controls and procedures to process this information.“    If a company’s materiality threshold is very high, they cannot simply use this as an excuse to avoid making disclosures (Part 3 in this series provides suggestions).  

As noted in Part 1, the U.S. Government Accounting Office (GAO) published a report in 2004 in which it acknowledged that investors interested in detailed sustainability data and information are not getting it in financial reporting or disclosures required for public companies.  The GAO report also acknowledged that it was not consistent with the SEC’s mission to require it.  The SEC Guidance in February 2010 says that “although some information relating to GHG emissions and climate change is disclosed in SEC filings, much more information is publicly available outside of public company disclosure documents filed with the SEC as a result of voluntary disclosure initiatives or other regulatory requirements.”

The Guidance mentions The Climate Registry (TCR), the Carbon Disclosure Project (CDP), and the Global Reporting Initiative (GRI) by name.  TCR and CDP are nonprofit organizations designed as voluntary disclosure vehicles for GHG emissions and activities.  Companies’ reports to these two groups are expected to be accurate and consistent with other environmental reporting to agencies.  Companies can indicate their enterprise boundary (e.g., Scope 1 only, Scope 1 and 2, partial Scope 3 using the GHG protocol or other designated standard).  The CDP has a unique arrangement with Bloomberg LP, such that investors and traders on the New York Stock Exchange seeking information on a company’s environmental performance can tap directly into CDP data.  The GRI is a framework for voluntary sustainability reporting for any and all matters relating to environmental, economic, and social/ stakeholder factors at a company.  Companies are free to report any data, performance metrics, goals, stories, programs, or information as they see fit. 


The SEC Guidance represents an excellent “teaching moment.”   It is a thorough review of applicable rules for financial disclosures, repeatedly emphasizing principles and concepts the SEC applies for all matters – not just risks associated with climate change.  It is also a boost for TCR, CDP, GRI, and perhaps other frameworks or groups that promote complete, accurate, and supportable reporting and disclosure of environmental performance.  Financial auditors and business leaders may read the SEC Guidance on climate change, and recognizing familiar rules and concepts, dismiss the guidance as being nothing new.  The environmental community may read the guidance, and take heart that the SEC finally acknowledged Climate Change – but come away disappointed with no new requirements, failing to recognize the significance of the mention of CDP and others. 

Part 3

Part 3 in the series provides the author’s perspectives and suggestions on how companies should proceed in the wake of the SEC Guidance.

About the Author

Douglas Hileman, P.E., CPEA, has over 34 years of experience in the environmental, safety and sustainability (ESS) fields.  He worked for nine years in industry in environmental operations, corporate ESS program development, and due diligence.  He has 25 years of experience in consulting, including six years as an in-house specialist at PricewaterhouseCoopers LLP.  While at PwC, he supported financial audit teams for environmental liabilities, Sarbanes-Oxley compliance, and business processes, systems and controls.   He has conducted ESS audits of conformance with consent decrees, sustainability data and claims, and many other elements of ESS.  He is on the Board of the Auditing Roundtable.  He is a Certified Professional Environmental Auditor, a Qualified Environmental Professional, and a member of the Institute of Internal Auditors.  He is teaching “Financial Aspects of Sustainability” at UCLA Extension in Spring 2010.  Information on his firm can be found at

Image:  Growing Graph by Christian Ferrari, Italy.


Securities and Exchange Commission Guidance on Disclosure Related to Climate Change;  effective February 8, 2010; 

The Climate Registry; 

Carbon Disclosure Project; 

Global Reporting Initiative;

Read the Rest of the Articles in this Series

Part 1 – The Basics of Financial and Nonfinancial Reporting and Disclosures

Part 2 – Detailed Analysis

Part 3 – Suggestions for Climate Change Disclosures

Tags: , , ,

Leave a Comment