Sep 22020

SEC Updates Disclosures Required by Regulation S-K — Impact on Environmental Disclosure

Maureen M. Crough and Heather M. Palmer
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On August 26, 2020, the U.S. Securities and Exchange Commission (SEC) adopted amendments to “modernize” its rules requiring disclosure about a company’s business description, legal proceedings, and risk factors. The SEC amended these items to make them more clearly principles-based as well as to enhance the readability of disclosures, discourage repetitive and immaterial disclosures, and reduce the compliance burden on companies. The amendments were adopted substantially as proposed by the SEC in August 2019 with certain modifications. With regard to environmental matters, one of the amendments broadens disclosure about the material effects of environmental compliance to encompass the material effects of compliance with all laws, while the other changes the threshold for disclosure of environmental legal proceedings involving the government.

Disclosure Requirement Summary of Amendment and Rationale
   Description of Business

   Regulation S-K Item 101(c)

Item 101(c)(1)(xii) currently requires “appropriate disclosure” of the material effects that compliance with environmental laws may have on the capital expenditures, earnings, and competitive position of the registrant and its subsidiaries. The registrant must disclose material estimated capital expenditures for environmental control facilities for the remainder of its current fiscal year, succeeding fiscal year, and further periods the registrant may deem material.

Amendment

    • Will require, if material, disclosure of the material effects that compliance with “government regulations, including environmental regulations” — as opposed to only environmental laws under the current rule — may have on the capital expenditures, earnings, and competitive position of the company and its subsidiaries. According to the SEC, this expansion is consistent with current practice as many companies already provide voluntary disclosure about government regulations relevant to their business.
   Legal Proceedings

   Regulation S-K Item 103

Item 103 currently requires disclosure of material pending legal proceedings and certain related information (e.g., the name of the court, the date instituted, the principal parties involved, and the alleged factual basis underlying the proceedings). An instruction to the current rule requires disclosure of any proceedings under environmental laws to which the government is a party unless the company reasonably believes that monetary sanctions resulting from the proceeding will be less than $100,000.

Amendment

  • Will implement a modified disclosure threshold for environmental proceedings to which the government is a party that increases the current threshold from $100,000 to $300,000 and also allows a company to select a different threshold that it determines is reasonably designed to result in disclosure of material environmental proceedings so long as this company-specific threshold does not exceed the lesser of $1 million or 1 percent of the current assets of the company and its subsidiaries on a consolidated basis. The amendments are intended to adjust for inflation since the current threshold was adopted in 1982 as well as provide flexibility to use a disclosure threshold that is most indicative of materiality on a company-specific basis. If a company chooses to use a company-specific threshold rather than the bright-line threshold of $300,000, it must disclose the tailored threshold (including any change thereto) in each Form 10-K and 10-Q filing.

 

The amendments were adopted by a 3-2 vote of the SEC Commissioners. With regard to environmental matters, the two dissenting Commissioners, Caroline Crenshaw and Allison Herren Lee, expressed their disapproval that the amendments are “silent on two critical subjects: diversity and climate risk disclosures.”1  According to Commissioner Lee, in response to the amendments proposed in 2019, the SEC received thousands of comments about climate risk disclosure. Commissioner Crenshaw has urged the SEC to form (1) an internal task force to study how investors use information about human capital management, climate change risk, and other environmental, social, and governance (ESG) metrics to assess long-term financial performance and (2) an external ESG Advisory Committee composed of investors, reporting companies, and subject matter experts to guide the SEC in revising and expanding its approach to, and regulation of, ESG disclosures.

The amendments will go into effect 30 days after publication in the Federal Register.

1 Here are links to the public statements about the final amendments issued by Commissioner Caroline Crenshaw and Commissioner Allison Herren Lee.

Maureen M. Crough

New York

mcrough@sidley.com

Heather M. Palmer

Houston

hpalmer@sidley.com

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