EHS Management

What the SEC Says about Reporting Climate Change 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.

Yesterday we reviewed SEC risk disclosure requirements. Today we will discuss an SEC interpretive guidance concerning the applicability of disclosure requirements related to climate change risks.

Direct Impact of Climate Change Legislation and Regulation

According to the SEC interpretive guidance, significant developments in federal and state legislation and regulations may trigger disclosure obligations under the Commission’s S-K items 101, 103, 303, and 503(c).

Item 101 requires disclosure of any material estimated capital expenditures for environmental control. According to the SEC interpretive guidance, this could encompass the effects of limits on greenhouse gas (GHG) emissions on capital expenditures, earnings, and competitive position and must, therefore, be disclosed.

Item 503(c) requires disclosure of risk factors. The SEC guidance suggests that companies consider specific risks they face as a result of climate change legislation or regulation, and avoid generic risk factor disclosure that could apply to any company. For example, companies that are particularly sensitive to GHG legislation or regulation, such as those in the energy sector, may face significantly different risks from climate change legislation or regulation compared to companies that currently rely on products that emit GHGs, such those in the transportation sector.

Item 303 requires companies to assess whether any enacted climate change legislation or regulation is reasonably likely to have a material effect on their financial condition or results of operation.


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Indirect Consequences of Regulation or Business Trends

According to the SEC, legal, technological, political, and scientific developments regarding climate change may create new opportunities or risks for companies. For instance, a company may face decreased demand for goods that produce significant GHG emissions or increased demand for goods that result in lower emissions than competing products. As such, a company should consider for disclosure purposes the actual or potential indirect consequences it may face due to climate change related regulatory or business trends.

Impact of International Treaties and Agreements 

The SEC interpretive guidance calls on companies to consider and disclose, when material, the risks or effects on its business of international accords and treaties relating to climate change. Companies whose businesses are reasonably likely to be affected by international agreements are encouraged to monitor the progress of the agreements and consider the impact on their disclosure obligations based on S-K Item 303 requirements. These requirements state that management discuss and analyze the financial conditions and describe any known trends or uncertainties that have had, or that the registrant reasonably expects will have, a material favorable or unfavorable impact on net sales or revenues or income from continuing operations.


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Physical Impacts of Climate Change

Under the SEC interpretive guidance, companies are directed to evaluate for disclosure purposes significant physical effects of climate change such as effects on the severity of weather, sea levels, arability of farmland, and water availability and quality.