Counsel at public companies have a new task: Figure out how climate change is likely to affect their businesses.
That's the message from the Securities and Exchange Commission, which published new disclosure guidance (.pdf) Monday.
Jane Kroesche, head of the West Coast environmental transactions practice at Skadden, Arps, Slate, Meagher & Flom, said meeting the new requirements will not just be a matter of "plugging language" into the business discussion or legal proceedings section, where companies usually make environmental disclosures.
The most difficult reporting will be in the management discussion and analysis section, in which trends and impacts on capital investments are revealed.
"It is a very broad-reaching guidance," Kroesche said. "It's important for companies to understand that it's not just about disclosing the impact from emissions regulations. It goes way beyond that."
A coalition of about 150 environmental and investment groups, including CalPERS and Environmental Defense Fund, had encouraged the SEC to issue guidelines on climate change. The commission approved the guidelines in January by a 3-2 vote, split along party lines. It published the guidelines on Monday and they are effective immediately. The SEC hasn't issued new rules; rather, the guidelines are intended to help companies comply with existing rules.
"This is the commission's nod to those investor groups, saying, 'We understand what you are saying, we understand that you are concerned, and we are going to tell the world of public companies: You are going to have to pay attention to these issues in your disclosures,'" said Andrew Thorpe, a corporate lawyer at Morrison & Foerster who once worked at the SEC's rulemaking office.
The SEC laid out four areas where climate change could trigger disclosure requirements: legislation and regulations (such as cap and trade or a carbon tax), international accords (such as the Kyoto Protocol), indirect consequences of regulation and business trends (lower or higher demand because of public perception of carbon intensive products), and physical impacts of climate change (a factory at sea level or in a water-strapped region).
People anticipated the move, but not so soon into the new administration, said Robert O'Connor, head of the clean tech practice at Wilson Sonsini Goodrich & Rosati.
"This was an issue that was dead in the water under the prior administration," O'Connor said.
He said the challenge for corporations under these new guidelines will be twofold. Companies must have the infrastructure in place to know whether there is something to disclose. And, they must find out if they are responsible for carbon emissions along their whole supply chain, or just some of it.
"It is very early. For many companies, it will not rise to the level of materiality, but I do think that all companies need to ask the question, 'Do I have the procedures and systems in place to know one way or the other?'" O'Connor said.
The biggest risks to companies, O'Connor said, would come if a global climate treaty or a tax on carbon emissions passes.