While only time will tell, nearly half of the general population thinks sustainability is a long-term cultural shift rather than a short-term fad. And the number of consumers who think sustainability is here to stay has increased consistently since 2007. In other words, they are expecting that the changes they are making in their lives and the changes companies are making in their businesses to be long-term changes, regardless of the economic downturn, climate science or political situation.
 
According to the Natural Marketing Institute’s (NMI) 2009 LOHAS consumer insights survey, 91% of U.S. adults are aware of the term “global warming,” a significant increase over 2007. In evaluating corporate social responsibility (CSR), environmental issues have recently received more attention from companies than social issues have, and in fact 86% of consumers pick one or more specific environmental activities they want companies to engage in when given a list to choose from.

While these data should not be the only criteria companies use to develop CSR programs, they should be considered in what is communicated to consumers in order to maximize sustainability return on investment. Recent SEC guidance further emphasizes that issues related to our environment and climate change impact our industry.
 
SEC Issues Guidance on Disclosure Related to Climate Change

On February 2, 2010, the Securities and Exchange Commission (SEC) issued an interpretive release providing guidance to public companies on disclosures regarding the effects of climate change on their businesses. This month’s “Business Insights” column summarizes the issues that the SEC suggested should be covered in the climate change disclosures, as well as applicable rules.
 
Topics for Climate Change Disclosures Suggested by the SEC. The SEC release, as well as the speech by the SEC Commissioner, provided some practical guidance regarding issues that may prompt climate change disclosures. Basically, companies should discuss in their SEC filings the direct effect of environmental legislation, regulation and international treaties; the indirect consequences of climate change; and the impact of physical changes to our planet caused by climate change.

Impact of Legislation, Regulation and International Treaties. Recent developments in federal and state legislation and regulation regarding climate change may trigger disclosures in the description of the company’s business, risk factors and management’s discussion and analysis of financial condition and results of operations (“MD&A”). In addition, a public company should assess and disclose the impact on its business of treaties or international accords relating to climate change. A public company that may be affected by such accords should monitor the progress of any proposed agreements and the materiality of their potential impact on its business and operations.

Indirect Consequences of Climate Change. Developments related to climate change may create new opportunities or risks for public companies. These business trends or risks should be described as a risk factor or in the MD&A, and if they have a significant impact on the public company’s business, could affect the description of the company’s business. Indirect consequences of climate change may also include the impact on the company’s reputation. For example, the company may consider whether the public’s perception of data related to the company’s emissions could lead to potential adverse consequences to its business operations or financial condition due to the reputational damage.
 
Physical Impacts of Climate Change. In the release, the SEC noted that severe physical effects of climate change, such as severe weather conditions (floods or hurricanes), changes in sea levels, arability of farmland and water quality and availability could affect the company’s results of operations. Public companies whose businesses are susceptible to these types of events should consider disclosing the material risks or consequences of such events. A list of the possible consequences of severe weather conditions may include disruptions to operations, decreased agricultural production capacity in areas affected by drought or other weather-related changes.

SEC Existing Rules Requiring Climate Change Disclosures

SEC suggests that a company make climate change disclosure if the climate change has a material effect on the company’s business and operations. Generally, under the securities laws, information is considered material if there is a substantial likelihood that a reasonable investor would consider it important in deciding how to vote or make an investment decision, or if the information would alter the total mix of information available to the investor. The SEC recognizes that companies may have doubts as to materiality of information related to the climate change. However, the SEC believes it is appropriate that these doubts be resolved in favor of disclosure to investors.

Description of Business. A public company must describe its business and the business of its subsidiaries, including the material effects of compliance with environmental laws on the company’s capital expenditures, earnings and competitive position. The company should also disclose its material estimated capital expenditures for environmental control facilities for appropriate time periods.
 
Legal Proceedings. Generally, a public company must describe any material legal proceedings and actions contemplated by governmental agencies, in which it or any of its subsidiaries is involved, or if its property is the subject of the litigation or governmental action. Subject to certain conditions, a public company must also disclose environmental administrative or judicial proceedings that are material to the company’s business or financial condition.
 
Risk Factors. A public company must discuss its most significant risk factors that make an investment in the company speculative or risky. For example, it must disclose a risk factor regarding existing or pending legislation or regulation relating to climate change.
 
MD&A. A public company must include a detailed MD&A section designed to provide material historical and prospective information enabling investors to assess the financial condition and results of operations of the company. Depending on the business of the company, trends or uncertainties related to climate change issues may materially affect its business operations.
 
For example, public companies should assess whether enacted or pending climate change legislation or regulation is reasonably likely to have a material effect, positive or negative, on the company’s financial condition or results of operations.

Conclusion

The rewards of a successful CSR campaign are clear: a well-thought out and executed program can enhance the company’s reputation and differentiate it. In light of the SEC guidance and as part of such a program, a public company that is in the process of preparing its annual or quarterly report or registration statement should:
 
• Review its disclosures related to the business description, legal proceedings that the company is involved in, risk factors and MD&A; and

• Evaluate whether additional or revised disclosure is necessary to reflect the risks or opportunities created for the company by the climate change.      

References furnished upon request.