In February 2010, the U.S. Securities and Exchange Commission (SEC) issued interpretive guidance (the "Guidance") for risk disclosure requirements regarding climate change. Following the SEC's publication, ASTM International finalized a standard to assist disclosing entities with their determination as to when to make a disclosure and what to include in any disclosure they are making. The ASTM Standard, E2718, Standard Guide for Financial Disclosures Attributed to Climate Change (the "Standard"), has been under development for two years and was finalized on March 26, 2010. ASTM International develops technical and market-relevant standards for use by individuals, businesses and agencies.
Both the SEC and the ASTM publications respond to growing concerns among investors and regulators about risks posed by climate change. The risks fall into three broad categories: regulation of greenhouse gas ("GHG") emissions, physical risks like rising sea levels and increased flooding and drought, and market changes driven by environmentally discerning investors and consumers. The significance of these risks and whether they have direct or indirect consequences will vary by business sector.
The SEC's Guidance is intended to assist public companies in complying with existing federal disclosure requirements for material risks. It neither changes existing disclosure requirements nor accepts any particular fact related to climate change. According to the Guidance, material impacts from legislation, regulation and international accords; indirect consequences of new laws and changing business trends; and potential physical impacts to facilities could trigger SEC disclosure obligations.
The ASTM Standard is intended to guide organizations in determining when disclosure of financial impacts attributable to climate change is appropriate and what should be disclosed with an organization's financial statements. The Standard identifies six circumstances that may indicate disclosure is warranted because each has or is likely to have financial impacts: (1) application of GHG emissions laws and regulations such as cap and trade, emission taxes, and emission reporting, as well as technology mandates or technology-forcing regulation; (2) anticipated changes in resource availability or costs; (3) anticipated physical changes that may affect assets; (4) insurance and other risk allocations in contracts relevant to climate change; (5) claims or litigation related to climate change liability of the organization; and (6) other information indicating that the organization has been or is likely to be financially impacted by climate change. The Standard also identifies sources of information an organization should review and recommends estimating each risk in terms of likelihood, severity and timing.
As to the content of disclosures, the Standard recommends including a strategic analysis from management of the financial impacts of climate change; identification of regulatory requirements with financial impacts; an explanation of the likelihood, severity and timing of financial impacts; a separate estimate of risks in light of insurance and other risk transfers; a discussion of internal factors that may influence the timing or degree of financial impacts; and a discussion of potential financial impacts that cannot be feasibly evaluated due to uncertainty. The Standard contemplates disclosures that include descriptions of the approach the organization took in making its estimates.
The scope of the ASTM Standard is consistent with the categories of risk identified by the SEC in its Guidance. The Standard by its own terms is "meant to supplement, rather than replace, the disclosure requirements as prescribed or regulated through...SEC, or any other agency or regulatory body." Public companies may find the ASTM Standard a helpful guide in ensuring that they comply with SEC material risk disclosure requirements. However, they will still have to determine what is material-a difficult task in light of the many uncertainties surrounding climate change. The ASTM Standard recommends aggregating financial impacts attributed to climate change risks in determining materiality.
If widely used, the ASTM Standard would foster a uniform approach to climate change risk disclosures in financial statements, but the Standard is entirely voluntary. It is uncertain whether the SEC Guidance will substantially change disclosures and to what extent businesses will utilize the ASTM Standard in evaluating financial impacts attributable to climate change. However, the two publications are indicative of a growing priority among investors with respect to the investigation and understanding of potential climate change impacts on businesses.
Day Pitney's February Alert on the SEC Guidance is available here.