SEC ENVIRONMENTAL REPORTING Association of Corporate Counsel Environmental and Sustainability Committee June 9, 2011 Holly Cannon Principal Beveridge & Diamond, P.C. Washington, DC dcannon@bdlaw.com
OVERVIEW Refresher on SEC Environmental Disclosure Requirements Recent Developments Guidance on Climate Change Disclosures Conflict Minerals Legislation 2
SEC ENVIRONMENTAL DISCLOSURE REQUIREMENTS Guiding Principles: Investors are entitled to information about potential investments prior to purchase SEC requires public companies to disclose material financial and non-financial information to enable investors to make informed investment decisions U.S. Supreme Court: Material if a reasonable investor would view it as significantly altering the total mix of information made available SEC: Material if there is a substantial likelihood that a reasonable person would consider it important No bright line test of materiality; both qualitative and quantitative factors must be used 3
SEC ENVIRONMENTAL DISCLOSURE REQUIREMENTS SEC has had environmental disclosure requirements since 1970s. These requirements cover: Narrative Disclosures in Public Filings (Annual Report, Form 10-K, Form 10-Q, Registration Statements, Prospectuses, etc.) Financial Statements 4
SEC ENVIRONMENTAL DISCLOSURE REQUIREMENTS Narrative Disclosure Requirements: SEC Regulation S-K (17 C.F.R. 229) Company must disclose all material information, unless Regulation S-K requires disclosure of more specific information. Costs of achieving compliance with existing laws Liabilities from actual or threatened legal proceedings Potential impacts based on regulatory trends and uncertainties 5
SEC ENVIRONMENTAL DISCLOSURE REQUIREMENTS Item 101 of Regulation S-K: Description of Business Disclose material effects that compliance with environmental legal requirements may have on capital expenditures, earnings and competitive position. Time Frame: Current and following year, and far enough ahead to make disclosure not misleading. Must include material estimated capital expenditures for environmental control facilities. Estimates: Set forth the source, assumptions, methods and extent of uncertainty necessary for the disclosure not to be misleading. 6
SEC ENVIRONMENTAL DISCLOSURE REQUIREMENTS Item 103 of Regulation S-K: Legal Proceedings Disclose pending or contemplated administrative or judicial proceedings under environmental laws if: Material to the company s business or financial condition; Claims for damages, potential monetary sanctions, capital expenditures, deferred charges, etc., exceed 10% of current assets; OR Government authority is a party and proceeding involves potential monetary sanctions, unless reasonable belief that monetary sanctions will be less than $100,000. If disclosure required, must include name of court or agency, date proceeding instituted, principal parties, alleged factual basis, and relief sought. 7
SEC ENVIRONMENTAL DISCLOSURE REQUIREMENTS Item 303 of Regulation S-K: Management s Discussion and Analysis (MD&A) Must discuss known trends... events or uncertainties... that are reasonably likely to have a material impact on liquidity, capital, sales, revenue or income. Disclose material events and uncertainties that would cause financial information not to be indicative of future financial condition. SEC Interpretive Release: Proposed legislation or regulation requiring future capital expenditures to install pollution control devices; Designation as a PRP at a Superfund site; and Recurring costs associated with managing hazardous substances and pollution in connection with ongoing operations. 8
SEC ENVIRONMENTAL DISCLOSURE REQUIREMENTS Item 303 of Regulation S-K: MD&A Is the known trend, demand, commitment or uncertainty likely to come to fruition? (If not reasonably likely, no disclosure required.) If yes or unclear, must objectively evaluate consequences of event or uncertainty. Disclosure required unless management determines that a material effect on financial condition or results of operations is not reasonably likely. Must quantify to the extent reasonably practicable. 9
SEC ENVIRONMENTAL DISCLOSURE REQUIREMENTS Item 503 of Regulation S-K: Risk Factors Requires appropriate discussion under the caption Risk Factors of the most significant factors that make investment in the entity s securities speculative or risky. Disclosure must contain an explanation of how the risk affects the entity or the securities being offered. Does not specifically mention environmental risks, but such risks must be disclosed if significant to the entity or the offering. 10
SEC ENVIRONMENTAL DISCLOSURE REQUIREMENTS Financial Disclosure Requirements SEC Regulation S-X Generally Accepted Accounting Principles (GAAP) Statement of Financial Accounting Standards Board, Accounting Standards Codification 450 (Contingencies) SEC Staff Accounting Bulletin No. 92 (Environmental Loss Contingencies) AICPA Statement of Position 96-1 (Environmental Remediation Liabilities) 11
SEC ENVIRONMENTAL DISCLOSURE REQUIREMENTS Other Requirements: Sarbanes-Oxley 404 Requires management to establish and maintain internal controls and procedures for financial reporting, and to assess annually the effectiveness of those controls and procedures. 12
RECENT DEVELOPMENTS SEC Guidance on Climate Change Disclosure Requirements SEC issued interpretive release (effective February 8, 2010) Clarified that existing SEC rules require disclosure of material climate-related risks and opportunities Description of Business Legal Proceedings Management s Discussion and Analysis Risk Factors 13
RECENT DEVELOPMENTS SEC Guidance on Climate Change Disclosure Requirements Potential Triggers for Climate-Related Disclosure Requirements: Impact of Climate Legislation and Regulation Environmental compliance costs relating to climate change, e.g., cost to purchase credits under cap-and-trade scheme Cost to comply with emerging EPA and state GHG initiatives, e.g., mandatory GHG reporting rule Changes in earnings from increased or decreased demand for goods and services International Accords Environmental compliance costs, changes in demand for goods and services due to international initiatives (e.g., UNFCCC, Kyoto Protocol) 14
RECENT DEVELOPMENTS SEC Guidance on Climate Change Disclosure Requirements Potential Triggers for Climate-Related Disclosure Requirements (continued): Indirect Consequences of Regulation / Business Trends Reputational harm, e.g., due to publicly available data on corporate GHG emissions Decreased demand for GHG-intensive products and services Physical Impacts of Climate Change Property damage, disruptions for companies with operations concentrated on coastlines 15
RECENT DEVELOPMENTS U.S. Conflict Minerals Legislation Section 1502 of Dodd-Frank Wall Street Reform and Consumer Protection Act New Annual SEC Reporting Requirements for Manufacturers if Conflict Minerals (or Metals Derived from Them) are Necessary for Functionality or Production of Products Not a Prohibition; Designed to Achieve Transparency in Supply Chain 16
RECENT DEVELOPMENTS U.S. Conflict Minerals Legislation Restrictions Based on Origin of Materials Democratic Republic of Congo or Adjoining Countries Requirements Apply to Conflict Minerals and Their Derivatives Columbite-tantalite (used to produce Tantalum) Cassiterite (Sn) (used to produce Tin) Wolframite (W) (used to produce Tungsten) Gold 17
RECENT DEVELOPMENTS U.S. Conflict Minerals Legislation 1 Annual SEC Disclosure 2 If Yes or cannot tell, 3 Other Key Provisions: Report / Identify: Determine whether products contain conflict minerals produced in DRC or adjoining countries Reasonable country of origin inquiry Description of measures to exercise due diligence on source and chain of custody of minerals Any products that are not DRC conflict free (i.e., products that contain minerals that finance or benefit armed groups) Facilities used to process conflict minerals (i.e., smelter) Country of origin Information on efforts to determine mine of origin Reports audited by independent auditor Audit must be certified Report posted on company website Option: label products DRC Conflict Free 18
RECENT DEVELOPMENTS U.S. Conflict Minerals Legislation Ambiguities: What is manufacture? Contract manufacturers? Yes, includes entity that offers generic product under own brand, even if no influence over specifications Branded manufacturers? Yes: any entity with any influence over specifications Distributors and importers? Probably not Retailers? Probably not. What is due diligence in this context? What if you don t know country of origin? Will recycled material be excluded? Will there be a de minimis exemption? 19
RECENT DEVELOPMENTS U.S. Conflict Minerals Legislation SEC proposed rules December 15. Comments: http://www.sec.gov/comments/df-title-xv/specializeddisclosures/specialized-disclosures.shtml SEC originally scheduled to release final rules by April 15, but announced delay. Currently indicating release in August to December timeframe (presumably early in that process). Companies must disclose/report on first fiscal year after promulgation of rules. 20