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Speech by SEC Commissioner:
Responding to Investors' Requests for SEC Guidance on Disclosures of Risks Related to Climate Change

by

Commissioner Luis A. Aguilar

U.S. Securities and Exchange Commission

Washington, D.C.
January 27, 2010

Good morning. Let me add my thanks to the staff for their work on this interpretive release. I also thank the investors, organizations, and officers of state governments that provided the Commission with their thoughtful petition for interpretive guidance related to climate risk disclosure. I think both investors and corporations will find the guidance before us today extremely useful.

Over two years ago, the Intergovernmental Panel on Climate Change concluded that it is "unequivocal" that the Earth's climate is warming. In October of last year, 13 federal agencies and departments published a coordinated annual report to Congress that reached the same conclusion.¹ It is expected that climate change, if unchecked, will result in severe harm to ecosystems and people around the world.

So it is no surprise that regulation of greenhouse gases has the attention of state governments, Capitol Hill, and the Environmental Protection Agency, as well as the attention of investors and companies.

Against this backdrop of a changing climate and changing legislative and regulatory landscapes, it is only natural that there are questions about what companies should be disclosing to investors. Today's release is an important step toward answering these questions. By explaining what our existing rules currently require with respect to climate change disclosure, today's release should help companies comply.

In particular, today's release clarifies the responsibility of companies to discuss:

First, the direct effects of existing and pending environmental regulation, legislation, and international treaties on the company's business, its operations, risk factors, and in Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A).
Second, the indirect effects of such legislation and regulation on a company's business, such as changes in demand for products that create or reduce greenhouse gas emissions.
Third, the effect on a company's business and operations related to the physical changes to our planet caused by climate change — such as rising seas, stronger storms, and increased drought. These changes to the environment could have a number of material effects on corporations, such as impairing the distribution and production of goods and damaging property, plant, and equipment.

Climate change and related governmental action can create risks and opportunities for companies. It is clear that disclosure of this material information will inform and aid investors in their decision making. It is often said that MD&A is the place to disclose the issues keeping management up at night. This release clarifies that effects resulting from climate change that are keeping management up at night should be disclosed to investors. Additionally, today's interpretive release should facilitate disclosure to investors regarding regulatory restrictions on greenhouse gas emissions that would materially change a company's business and future prospects.

I would also like to emphasize two practical points that companies should keep in mind when preparing their disclosure.

Companies should know their emissions information in order to evaluate the risks

First, a company needs to consider whether it has an effective system for collecting information about its emissions. When evaluating whether disclosure of the possible effects of pending climate change legislation, such as the federal cap and trade legislation, is required, a company may need to consider whether the legislation or regulation, if enacted, is reasonably likely to have a material effect on it. Therefore, as we say in the release, "management should ensure that it has sufficient information regarding the registrant's greenhouse gas emissions and other operational matters to evaluate the likelihood of a material effect arising from the subject legislation or regulation."

Registrants should focus on investors when considering whether information is material

Second, if there is a close question about whether or not information is material, the company should decide in favor of disclosure to investors. I remind companies of this principle because the items discussed in the release before us generally require disclosure only of information that is material.

As the Supreme Court has explained, doubts about materiality will be "commonplace," but these doubts should be resolved in favor of investors.² Similarly, previous Commission MD&A guidance clearly requires disclosure of known trends, events, or uncertainties where materiality is uncertain.³

Conclusion

The Commission's action today is a first step in an area where the Commission will begin to play a more proactive role, consistent with our mandate under the National Environmental Policy Act of 1969, to consider the environment in our regulatory action. The National Environmental Policy Act charged the Federal Government "to use all practicable means" to, among other things, "fulfill the responsibilities of each generation as trustee of the environment for succeeding generations."⁴

Accordingly, I look forward to the Commission's roundtable on climate change to be held later this year. I also look forward to the ongoing work of the Commission's Investor Advisory Committee regarding enhanced environmental, social, and governance disclosures. As the sponsor of the Investor Advisory Committee, I commend the committee members for taking up these matters as one of the many issues within the committee's broad mandate.

Thank you.

Endnotes

¹ See, Our Changing Planet: The U.S. Climate Change Science Program for Fiscal Year 2010 (stating that "Recent studies have (1) shown through observations that warming of the climate is unequivocal; (2) the global warming observed over the past 50 years is due primarily to human-induced emissions of heat-trapping gases; and (3) these emissions come mainly from the burning of fossil fuels (coal, oil, and gas), with important contributions from the clearing of forests, agricultural practices, and other activities."). The U.S. Global Change Research Program (USGCRP) coordinates and integrates federal research on changes in the global environment and their implications for society. The USGCRP began as a presidential initiative in 1989 and was mandated by Congress in the Global Change Research Act of 1990 (P.L. 101-606). The program comprises the Department of Commerce, Department of Defense, Department of Energy, Department of the Interior, Department of State, Department of Transportation, Department of Health and Human Services, National Aeronautics and Space Administration, National Science Foundation, Smithsonian Institution, Agency for International Development, Department of Agriculture, and the Environmental Protection Agency.

³ See, Interpretive Release: Management's Discussion and Analysis of Financial Condition and Results of Operations; Certain Investment Company Disclosures, Release No. 33-6835 (May 18, 1989) [54 FR 22427] (noting that, as to the disclosure of a known uncertainty, disclosure is required in MD&A unless management can determine that the uncertainty is not reasonably likely to occur, and, if that determination cannot be made, then management must assume the event occurs and make disclosure unless management determines that a material effect on the registrant is not reasonably likely to occur.).

http://www.sec.gov/news/speech/2010/spch012710laa-climate.htm

Speech by SEC Commissioner: Responding to Investors' Requests for SEC Guidance on Disclosures of Risks Related to Climate Change

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