Last month the subject of disclosing the business impact of climate change generated plenty of heat at an open meeting of the Securities and Exchange Commission. Going forward the SEC's new interpretive guidance on the matter could make some finance chiefs a little warm under the collar.

By a 3-to-2 margin, the SEC commissioners voted on January 27 to issue guidance to help public companies interpret existing environmental-disclosure rules as they relate to climate-change risk. In casting their dissenting votes, two commissioners — Kathleen Casey and Troy Paredes, both Republicans — delivered unusually detailed objections to issuing the document.

Casey argued that existing disclosure rules were adequate and additional guidance was unnecessary. "There is no credible reason to single out climate-change issues for discussion," she asserted. Casey said there has been no evidence of chronic underreporting by companies on climate-change risk. Further, she contended the concept of disclosing potential financial, legal, and physical risks associated with climate change was "premature at best" because "the science surrounding global warming remains far from settled."

Not surprisingly, SEC chairman Mary Schapiro defended the new guidelines. "The commission is not making any kind of statement regarding the facts as they relate to the topic of climate change or global warming," she said. "We are not opining on whether the world's climate is changing."

But the release of the 29-page interpretive guidance does signal that SEC staff will pay more attention to climate-change-related data in future reviews. The commission plans to hold a roundtable on the topic this spring and has directed its investor advisory committee to think about issues surrounding climate-change disclosures.

The guidance will also prompt companies to reexamine whether they have material climate-change risk that should be disclosed. In particular, it calls on companies to consider the likelihood of a cap-and-trade system becoming law and the effects that such a law would have on them, along with any existing or pending regional, state, and international environmental rules. The guidance specifies the items that should be considered, such as the costs of buying carbon credits or reducing carbon emissions to meet tighter regulations. Companies should also disclose if they may benefit from a cap-and-trade system, such as by selling carbon credits or through business growth.

With so much uncertainty about the legislative process, companies will try to satisfy the SEC's demands with boilerplate language and few details, predicts Gregory Bibler, chair of Goodwin Procter's environmental practice. Still, the climate-change guidance appears to give companies less wiggle room than other SEC guidance, instructing them to avoid allowing "generic risk factor disclosure" to creep into the relevant sections of financial reports, such as management's discussion and analysis.

Katie Pavlovsky, co-leader of Deloitte's enterprise sustainability group, says that to her knowledge, the SEC has never brought an enforcement action against a company for inadequate climate-change disclosures. Meanwhile, attorneys say it will be at least a year before finance chiefs will learn just how seriously the SEC is taking its new guidance, as the commission's staff reviews companies' disclosures in the coming months.

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