As President Obama reiterated in the State of the Union address this week ("And, yes, it means passing a comprehensive energy and climate bill..."), advancing climate change legislation remains high on his agenda. The inevitable regulation of greenhouse gases has the attention of the states, Congress, and the United States Environmental Protection Agency, as well as the attention of companies and their investors.

On Wednesday, January 27, 2010, the United States Securities and Exchange Commission ("SEC") provided guidance to public companies regarding their disclosures concerning material risks that climate change might pose to their businesses. On a party-line 3-2 vote, the SEC approved new "interpretive guidance" that is intended to clarify what publicly traded companies must disclose to investors regarding the impacts that business and legal developments related to climate change may have on their businesses. The interpretive guidance does not create a new rule or legal obligation, but rather interprets existing rules. The commission indicated that the interpretative guidance would relate to existing disclosure rules concerning risk factors, business description, legal proceedings and management's discussion and analysis.

Companies must decide whether climate change will have "material" effects on their business operations and to what extent, whether due to new emissions management policies, the physical impacts of changing weather, or business opportunities associated with the growing clean energy economy. The guidance is also in line with this administration's quest for greater transparency on a variety of fronts, including disclosure issues.

The guidance highlights the following as areas where climate change may trigger disclosure requirements:

• Impact of Legislation and Regulation: The commission said that companies could be helped or hurt by climate-related lawsuits, legislation, or regulation and should evaluate whether the impacts are material. The new guidance indicates that companies may need to disclose the potential (favorable or unfavorable) impacts of pending climate change legislation.
• Impact of International Accords: As for regulations and legislation, the same analysis applies to international treaties and accords relating to climate change.
• Indirect Consequences of Regulation or Business Trends: Climate change developments may create new business opportunities or risks for companies. A company might, for example, face decreased demand for goods that produce significant greenhouse gas emissions or, alternatively, higher demand for goods that lower greenhouse gas emissions. Companies must also disclose the actual or potential indirect impact of these climate change related trends. The commission also views harm to a company's reputation an indirect risk of climate change that warrants disclosure.
• Physical Impacts of Climate Change: A company should consider and disclose where material the actual and potential physical effects of climate change on a company's business and operations. Banks or insurance companies that invest in coastal properties potentially affected by more frequent floods, severe hurricanes or rising seas, for example, should, according to the commission, disclose such risks.

The SEC also emphasizes that in preparing a disclosure, a company must know their emissions information in order to effectively evaluate risks. Finally, the commission states that if there is any doubt about whether information is "material," it is well-settled that the company should decide in favor of disclosure to investors.

The SEC expects to release the guidance in the next few days and we will provide access to the guidance once it is made available.