Environmental Protection

Attorneys Speculate on Value of SEC Carbon Disclosure

Mia Mazza

Mia Mazza

Early in February, the U.S. Securities and Exchange Commission released "Commission Guidance Regarding Disclosure Related to Climate Change," Release Nos. 33-9106; 34-61369; FR-82.

There is much debate regarding whether this "interpretive guidance" adds any new disclosure requirements or simply reiterates what companies are already supposed to disclose about material risks associated with the effects of climate change under broad language of existing rules. The SEC says that the "interpretive guidance" does not create any new obligations.

Andrew Thorpe

Andrew Thorpe

Republicans have reacted strongly against the guidance. Two of the five members of the Commission are Republicans, and both of them voted against the passage of the guidance. Republican members of Congress have accused the Obama administration of using this guidance by the SEC "to promote a political agenda through regulation…with legislative progress on climate change having stalled."

Republicans are accusing the Obama administration of doing the same thing through the U.S. Environmental Protection Agency, which recently announced its intention to regulate greenhouse gas (GHG) emissions under federal clean air laws.

Several large investor groups representing more than $8 trillion dollars of assets under management requested the SEC release the interpretive guidance. Members of these groups include institutional investors such as—to name a few—the California Public Employees' Retirement System; the American Federation of State, County, and Municipal Employees; and the New York City Employee Retirement System.

These investor groups appear to maintain that climate-related information is material to their investment decisions even to companies whose carbon footprints are relatively small—and thus whose climate change risks are not likely to be material. They are pushing for all public companies to disclose a large number of data points and target numbers across the board, regardless of sector.

This push is being made on several fronts, including not just SEC disclosure, but also shareholder proposals regarding corporate risk assessments and the Carbon Disclosure Project, which creates peer pressure among companies to disclose emissions information.

At minimum, these efforts are designed to force companies to measure their GHG emissions so that they will be in a better position to assess potential risks. Most companies are not "heavy emitters" of GHGs, so the risks that they face are very speculative at this time.

This puts public companies in a sticky situation where they are being asked to "voluntarily" disclose information that they do not believe presents a material risk, and that they are not able to measure with great accuracy because there are no accepted standards for measuring. For anyone who deals with securities litigation, this is a situation that often can lead to later accusations of fraud-by-hindsight that are expensive to fight, even though they are meritless.

About the Authors

Mia Mazza is a partner at Morrison & Foerster who works with the firm's Cleantech practice in identifying and addressing securities-related challenges that may arise from increased government regulation of carbon emissions and other climate change-related developments. She joined the firm in 2000 and prior to that served as deputy attorney general in the criminal division of the California Department of Justice.

Andrew Thorpe is Of Counsel at Morrison & Foerster and has extensive experience in and knowledge of the SEC's regulation of public companies.

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