In February 2010, the United States Securities and Exchange Commission (SEC) released its Interpretive Release on Climate Change Disclosure (SEC Release). Subsequently, on April 1, 2010, ASTM International released E2718-10: Standard Guide for Financial Disclosures Attributed to Climate Change (Guide). The Guide is intended for voluntary use by reporting entities.

I. Purpose of the Guide

The purpose of the Guide is to assist publicly-traded companies in (1) identifying material financial impacts attributable to climate change that warrant disclosure in their financial statements, and (2) determining the appropriate content of the disclosure. The Guide states that it is designed to give instructions "consistent with good commercial and customary practice" for climate-change related disclosures accompanying audited and unaudited financial statements, and to encourage "consistent and comprehensive" disclosure of financial impacts attributed to climate change. The Guide is intended to apply to both domestic and international operations, at the discretion of the reporting entity.

The Guide focuses on when and how users may disclose material "financial impacts attributed to climate change" in "financial statements." It describes "financial impacts attributed to climate change" as encompassing material financial impacts on a reporting entity arising from climate change, including actual or anticipated regulatory burdens, changes in market conditions and physical harm to assets. The types of climate change-related impacts the Guide identifies include the same types of climate changerelated impacts the SEC Release suggests that reporting entities consider when making disclosures in SEC filings.

The Guide's definition of "financial statements" includes statements outside of SEC filings, statements associated with shareholder reporting, periodic reports, registration statements, and transactions such as financings and acquisitions.

II. Determining Whether Disclosure Is Warranted

To assist reporting entities in determining when disclosure of "financial impacts attributed to climate change" may be warranted, the Guide lists several examples of major climate change-related circumstances that may result in financial impacts. These examples include the following:

  • Predicted changes/trends in resource cost or availability;
  • Predicted changes in corporate assets due to physical changes attributable to climate change, such as increases in the severity of storms;
  • Contracts in which a company accepts responsibility for climate change risk, such as insurance policies; and
  • Litigation or claims asserted against a company alleging legal liability related to climate change.

III. Sources of Information to Consult

The Guide recommends that companies review the following sources of information:

  • "Any environmental record available from a government agency or a commercial entity;"
  • Internal records regarding GHGs and financial impacts associated with climate change;
  • Current and proposed foreign, national, state and local environmental laws or rules related to climate change; and
  • Publicly available and internal studies on benchmarking, modeling, trends and forecasts.

Once a company has identified a financial impact attributable to climate change, the Guide advises that the company should determine whether: (1) the likelihood of the impact occurring is more than remote; (2) the impact could have a severe impact on the reporting entity's normal operations or finances; and (3) the impact is anticipated to occur within the next year.

If these three conditions are met, the Guide directs the reporting entity to estimate the probability, effect and timing of the anticipated impact on the company's financial position. According to the Guide, the reporting entity should assess whether climate change impacts are material, on an aggregate basis, and if they are, they should be disclosed.

IV. Determining the Content of Disclosure

Once the company has determined that the climate change impacts are material, the Guide suggests that the company should disclose those impacts. The Guide states that disclosure of the material financial impacts of climate change should include the following:

  • Management's strategic analysis of the company's financial impacts arising from climate change, including the following:
    • Assessment of regulatory risks and opportunities;
    • Evaluation of physical risk to facilities;
    • Risks/opportunities related to the company's resources;
    • Risks related to financing;
    • Risks/opportunities related to the company's products/services;
    • Assessment of legal proceedings (including legislative and common law developments creating new bases of liability); and
    • Strategic activities related to climate change.

The Guide also advises that if a reporting entity thinks it will incur financial impacts because of climate change but cannot quantify them, it should disclose why they cannot be quantified.

V. Practical Implications

Companies considering whether and how to disclose the impacts of climate change in their financial statements may choose to consult the Guide for assistance. Reporting entities, though, should be mindful that the Guide is intended for use on a voluntary basis. Even if matters are not material, it appears that companies need to be able to think through their long-range impact, and have an obligation to stay current with existing and potential climate change developments.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.