The U.S. Securities and Exchange Commission (“SEC”) has recently issued two guidance letters related to the climate that may have an impact on publicly held companies business practices and disclosure obligations.
The first guidance letter broadened the scope of what is an appropriate topic for shareholder proposals under SEC Rule 14a-8 of the Securities and Exchange Act of 1934.[ii] Shareholder proposals are proposals submitted by qualifying shareholders for action at an upcoming meeting of shareholders. As of recent, corporations have been receiving an increasing number of proposals from insitutional shareholders. Indeed, the 2010 proxy season saw a record number of climate change focused shareholder resolutions.[iii] The proposals seek the disclosure of information regarding the impact of corporate activity on the environment, request the corporations to undertake sustainability initiatives and go as far as requesting corporations to not lend to specific environmentally damaging industries.[iv] If the shareholder proposal receives enough favorable votes at the shareholder meeting, it will require the board to take action on the proposal.
The guidance introduced a new analytical framework that the SEC will utilize in evaluating whether corporations can exclude shareholder proposals from their “proxy materials,” that which is used to inform shareholders and solicit votes for issues such as the election of corporate directors and other corporate actions.[v] It potentially allows climate change related shareholder proposals to be included with the corporation’s proxy materials if it (1) raises significant policy issues that (2) transcend the day-to-day business matters of the company.[vi]
This is a shift away from the historical stance of the SEC, which allowed corporations to exclude shareholder proposals if the proposals required corporations to engage in an evaluation of risk.[vii] Evaluation of risk was viewed as a “management function” relating to the company’s ordinary business operation and an inappropriate topic for shareholder proposals.[viii]
The second guidance letter addressed the disclosure of climate change risk in annual corporate Form 10-K filings.[ix] A Form 10-K is required by the SEC for publicly held companies and discusses the companies’ performance. The filing includes a discussion of risk factors, significant legal proceedings and management’s discussion and analysis of corporate activity, among other issues.
The interpretative guidance identified some areas that may trigger disclosure obligations[x]:
· Impact of legislation and regulation
· Impact of international accords
· Indirect consequences of regulation or business trends
· Physical impacts of climate change
The potential disclosure triggers outlined by the SEC are very broad and ambiguous. Two areas may present the biggest challenges for corporations as they consider the new guidance.
First, the amount of pending federal, regional, state and international regulatory and legislative action is enormous.[xi] The impact of legislation on business is a complex issue encompassing many layers of analysis of operations under different regulatory schemes.
Second, the physical effects of climate change present special challenges to businesses. The best scientists in the world have struggled with forecasting the effects of climate change and establishing the connection between climate change and greenhouse gas emissions, furthermore the science behind climate change is still called into question. It leaves corporations in the precarious position of trying to evaluate and disclose the potential physical impacts of climate change on their business.
On October 4, 2010, the SEC issued an order granting stay on the effectiveness of the second guidance letter pending the resolution of a lawsuit. The lawsuit challenged the legality of certain aspects of the release, specifically changes to proxy access rules, but did not challenge climate change disclosure changes. However, the court issued a stay on the entire guidance letter to not cause confusion over the issue. Pending the resolution of the lawsuit, corporations are absolved of their duty to comply with the guidance letter.
Practice Pointers for corporations:
§ Be cognizant of large institutional shareholders and their interest in climate issues
§ Evaluate risk exposure to climate change related shareholder proposals
§ Consider whether corporate activities have a significant impact on the environment
§ Prepare for additional SEC action on disclosure of material climate change risk
§ Monitor the climate change risk disclosures in 10-K filings of other similarly situated corporations
[ii] US. Security and Exchange Commission, Staff Legal Bulletin No. 14E (Oct. 27, 2009), available at http://www.sec.gov/interps/legal/cfslb14e.htm.
[iii] Investor Network on Climate, Risk, Climate Resolutions Toolkit , available at http://www.incr.com/resolutions/ (last visited Oct. 10, 2010).
[vi] US. Security and Exchange Commission, SEC Staff Legal Bulletin No. 14E (Oct. 27, 2009), available at http://www.sec.gov/interps/legal/cfslb14e.htm.
[vii] 17 CFR 240.14a-8(i)(7)
[ix] Commission Guidance Regarding Disclosure Related to Climate Change, Release Nos. 33-9106; 34-61469; FR-82 (Feb. 2, 2010), available at http://www.sec.gov/rules/interp/2010/33-9106.pdf
[xi] See Erika Morphy, Unprecedented Amount of Pending Green Legislation, GlobeSt.com, Feb. 25, 2010, available at http://www.globest.com/news/1606_1606/washington/183723-1.html.