EHS Management

Your SEC Requirements and Environmental Risks

Peabody Energy Corporation, the largest publicly traded coal company in the world, was recently muscled by the state of New York into revising its shareholder disclosures with the Securities and Exchange Commission (SEC) to include financial risks associated with climate change and potential regulations.

If you are a publicly traded company, what exactly are your risk disclosure requirements under the SEC? Today we will review those requirements, and tomorrow we will discuss an SEC interpretive guidance concerning the applicability of disclosure requirements related to climate change.

Damned If You Do; Damned If You Don’t

Environmental reporting is governed by three items in SEC’s S-K regulation, found at 17 CFR 229.101 to 229.915. Companies often encounter problems in determining which information should be reported and which can legally and responsibly be omitted from reports.

Costs or penalties resulting from environmental regulations, violations, litigation, or site remediation obligations can have a major impact on a company’s value.

But calculating the real impact associated with environmental responsibilities and liabilities is an inexact science, at best. Companies that overestimate the impact are unnecessarily damaging themselves. Companies that underestimate are exposing themselves and their shareholders to a precarious future.


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S-K Item 101—Description of Business

S-K Item 101 requires disclosure of the cost of complying with environmental law.

Disclosure must be made as to the material effects that compliance with federal, state, and local regulations concerning the discharge of materials into the environment, or otherwise relating to the protection of the environment, may have on the capital expenditures, earnings, and competitive position of the registrant and its subsidiaries. Companies must disclose any material estimated capital expenditures for environmental control facilities for the remainder of their current and succeeding fiscal years and for such further periods as they may deem material.

Smaller reporting companies (as defined in 17 CFR 229.10(f)) are required to disclose the costs and effects of complying with environmental laws.

S-K Item 503(c)—Risk Factors

Although environmental issues are not specifically mentioned, S-K Item 503(c) requires companies to provide, where appropriate, a discussion of the most significant factors that make an investment in the company speculative or risky. Item 503(c) states that risk factor disclosure should clearly state the risk and specify how the particular risk affects the particular company. An SEC interpretive guidance, which will be reviewed in tomorrow’s Advisor, discusses how Item 503(c) can be related to climate change.

S-K Item 103—Legal Proceedings

SK-Item 103 requires the reporting company to describe briefly any material pending legal proceedings, other than ordinary routine litigation incidental to the business, to which the company or any of its subsidiaries is a party or of which any of their property is the subject.

The SEC requires disclosure of liabilities that could have a “material” impact on the company’s financial or competitive position—information that would be important to investors. This includes legal proceedings that involve a claim for damages or potential monetary sanctions that exceed 10% of the current assets of the company. Companies also must report individual government enforcement proceedings that are expected to cost more than $100,000, as well as litigation that might have significant financial impact on the company. 

In an enforcement alert concerning SEC environmental disclosure requirements, the EPA points out that EPA-initiated enforcement actions meet the definition of “legal proceedings.” According to the EPA, the cost of penalties, injunctive relief, and supplemental environmental projects ordered in an EPA enforcement proceeding or an environmentally-based citizen suit—among other things—should be considered when determining if SEC’s reporting threshold for legal proceedings has been met.

The disclosure of information related to a legal proceeding is required even if the proceeding has not yet been initiated. If a company reasonably expects an enforcement action or other legal proceeding to be coming down the pike, it is required to report the information. So, if you know that the government is “contemplating” an action against your company, you are required under S-K Item 103 to report it.


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S-K Item 303—Management Discussion

Discussions required by S-K Item 303 have been described as giving investors the opportunity to view the company as management views it. Specifically, Item 303 requires that publicly traded companies disclose any known trends or uncertainties that have had, or that the company reasonably expects will have, a material, favorable, or unfavorable impact on net sales or revenues or income from continuing operations.

According to the EPA, Item 303 requires the disclosure of environmental contingencies that may reasonably have a material impact on net sales, revenue, or income from continuing operations.

Check tomorrow’s Advisor for a discussion of SEC’s interpretation for reporting climate change risks.