Commission Guidance Regarding Disclosure Related to Climate Change
For some companies, the regulatory, legislative, and other developments related to climate change could have a significant effect on operating and financial decisions, including those involving capital expenditures to reduce emissions and, for companies subject to “cap and trade” laws, expenses related to purchasing allowances where reduction targets cannot be met. Companies that may not be directly affected by such developments could nonetheless be indirectly affected by changing prices for goods or services provided by companies that are directly affected and that seek to reflect some or all of their changes in costs of goods in the prices they charge. In addition to legislative, regulatory, business, and market impacts related to climate change, there may be significant physical effects of climate change that have the potential to have a material effect on a registrant’s business and operations, such as:
- Effects that impact a registrant’s personnel, physical assets, supply chain, and distribution chain. They can include the impact of changes in weather patterns, such as increases in storm intensity, sea-level rise, melting of permafrost and temperature extremes on facilities or operations.
- Changes in the availability or quality of water, or other natural resources on which the registrant’s business depends, or damage to facilities or decreased efficiency of equipment.
- Physical changes associated with climate change that decrease consumer demand for products or services; for example, warmer temperatures could reduce demand for residential and commercial heating fuels, service, and equipment.
- Financial risks associated with climate change that arise from physical risks to entities other than the registrant itself. For example, climate-change-related physical changes and hazards to coastal property can pose credit risks for banks whose borrowers are located in at-risk areas.
- Dependence on suppliers that are impacted by climate change, such as companies that purchase agricultural products from farms adversely affected by droughts or floods.
Recently, the SEC published an interpretive release to provide guidance to public companies regarding their obligations under existing federal securities laws and regulations to consider climate change and its consequences as they prepare disclosure documents to be filed with the SEC and provided to investors. The interpretive guidance describes the most pertinent non-financial statement disclosure rules that may require disclosure related to climate change, such as those related to the registrant’s description of its business, legal proceedings, and risk factors, and management’s discussion and analysis of financial condition and results of operations. The interpretive guidance also addresses the application of those rules to the disclosure of certain specific climate-change-related matters, such as:
- The impact of legislation and regulation
- International accords
- Indirect consequences of regulation or business trends
- Physical impacts of climate change
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