Environmental and Climate Change Disclosure Under the ...
Environmental and Climate Change Disclosure Under the Securities Laws Securities Law Committee of the International Bar Association March 2016 Objectives and Methodology Objectives To compile a survey of environmental and climate change disclosure requirements under the securities laws of various jurisdictions in furtherance of the IBAs commitment to better understand global environmental and climate change issues To provide practitioners with an understanding of applicable environmental and climate change disclosure laws to assist their clients in complying with disclosure requirements in their home market and abroad Methodology Following the October 2015 IBA Annual Meeting in Vienna, a framework was developed to survey securities regulations on environmental and climate change disclosure requirements, with a focus on five broad areas IBA member law firms were invited to participate Responses have been synthesized in the following pages (and consolidated in the attachments hereto) 2 Survey Participants: 25 Countries Country Law Firm Country Law Firm Argentina Marval, OFarrell & Mairal Ireland William Fry
Austria Binder Grsswang Italy Macchi di Cellere Gangemi The Bahamas Higgs & Johnson Japan TMI Associates Brazil Pinheiro Neto Norway Selmer Canada Blake, Cassels & Graydon Poland Wardynski & Partners Chile Philippi Prietocarrizosa & Ura Russia Debevoise & Plimpton China Jun He
Singapore Allen & Gledhill Colombia Posse Herrera Ruiz Spain Ura Menndez Denmark Gorrissen Federspiel Sweden Mannheimer Swartling Finland Krogerus Turkey etinkaya Avukatlk Ortakl Germany Gleiss Lutz United Kingdom Slaughter & May Hungary Szecskay United States Debevoise & Plimpton India
IndusLaw 3 Framework 1. Explicit requirements. What disclosures are explicitly required by capital markets regulators with respect to: a. Environmental issues, e.g., applicable regulation, compliance, proceedings, investigations, etc. b. Climate change issues 2. Implicit requirements. What disclosures are implicitly required by capital markets regulator with respect to: a. Environmental issues, e.g., applicable regulation, compliance, proceedings, investigations, etc. b. Climate change issues 3. Foreign issuers. How are the explicit or implicit disclosure requirements above different for foreign issuers required to make filings in your jurisdiction? 4. Accounting disclosure. What disclosures are required by accounting principles applicable to public companies in your jurisdiction? Please specify whether each disclosure requirement is explicit or implicit. a. Environmental issues b. Climate change issues 5. Disclosure enforcement trends. a. What enforcement actions have capital markets regulators brought in the last five years concerning environmental disclosure? Climate change disclosure?
b. What are the key enforcement trends with regard to disclosure of environmental and/or climate change issues? 4 1. Explicit Requirements (1 of 2) No common approach among respondents securities laws Nevertheless, several explicit disclosure requirements that apply in more than one participating jurisdiction include: a discussion of environmental issues or policies as they relate to an issuers operations1 a Sustainability Report or environmental policy discussion by the board or management regarding environmental issues 2 industry- or division-specific disclosures regarding environmental performance or compliance with applicable regulations3 the effect of environmental issues on the companys utilization of assets disclosed as property, plant and equipment4 5 1. Explicit Requirements (2 of 2) The United States is unique among respondents in tying a disclosure requirement of environmental proceedings to a monetary threshold, regardless of materiality Any governmental proceeding to which a governmental authority is a party that involves monetary sanctions of at least $100,000 must be disclosed In five jurisdictions, there are no explicit environmental disclosure requirements5 All respondents indicated that there are no explicit disclosure requirements related to climate change 6 2. Implicit Requirements (1 of 2) As expected, all jurisdictions require disclosure of issues material to assessing the value of the issuers securities. This may take the form of a general disclosure of any material information, 6 but many jurisdictions specifically require disclosure of material information as part of a discussion of: risk factors relating to the issuer and its business 7 trends and uncertainties that the issuers management
reasonably believes will materially affect the issuers future performance (MD&A)8 contingent liabilities9 Four jurisdictions require a report of the issuers governance or social responsibility policies by the issuers board of directors or management. Although the responses indicate that environmental disclosure is not always mandatory under these reports, environmental and sustainability issues are likely disclosed pursuant to these obligations10 7 2. Implicit Requirements (2 of 2) Other implicit disclosure requirements highlighted by respondents include: necessary governmental authorizations for the issuer to perform its activities11 insurance contracts entered into by the company 12 asset retirement obligations13 information regarding the issuers energy consumption during the year 14 past events in the development of the issuers business and future investments15 a statement on the issuers principal assumptions in making forecasts or estimates16 measures taken or to be taken for the protection of the environment, including completed and anticipated projects17 Climate change issues may be disclosed under the general materiality standard as discussed on the previous slide The U.S. SEC issued guidance in 2010 regarding disclosure of issues related to climate change, noting that climate change may be relevant to an issuers description of its business, a discussion of legal proceedings, a discussion of risk factors and/or within the MD&A section. However, the SEC has not brought any enforcement actions related to insufficient 8 climate change disclosures since issuing the guidance 3. Treatment of Foreign Issuers Most jurisdictions impose the same disclosure standards on foreign issuers as apply to domestic issuers18 Notable exceptions to this principle are Canada, the U.K. and the U.S. Canada: generally, issuers subject to U.S. SEC disclosure obligations need only comply with SEC standards. Other foreign issuers generally need only comply with their home jurisdictions disclosure standards if the issuer is a designated foreign issuer and resides in a specified qualified jurisdiction U.K.: foreign companies are not subject to the explicit disclosure
requirements under the Companies Act, but need only comply with the requirements of their country of incorporation and those of the U.K. Listing Authority U.S.: foreign issuers must disclose environmental issues affecting material assets, including a description of any environmental issues that may affect the utilization of such assets Disclosure of certain governmental proceedings based on a monetary threshold does not apply Of note: foreign issuers are not currently allowed to sell securities in China. Foreign issuers may only list depositary receipts in India 9 4. Accounting Disclosures (1 of 3) Accounting requirements applicable to environmental and climate change disclosures are driven by IFRS in most jurisdictions surveyed, except for the Asian jurisdictions surveyed and the U.S. Set out in the following slides is a summary of the key accounting principles that may apply to financial statement disclosure of environmental and climate change issues 10 4. Accounting Disclosures (2 of 3) IFRS -Argentina -Austria -The Bahamas -Brazil -Canada -Chile -Colombia -Denmark -Finland -Germany -Ireland -Italy -Norway -Poland -Spain -Sweden -Turkey -United Kingdom
U.S. GAAP -United States Other -China (Chinese Accounting Standards) -India (Indian Accounting Standards) -Japan (Japanese GAAP, but IFRS permitted) -Russia (Russian Accounting Standards, but many companies must prepare IFRScompliant financials) -Singapore (follows SFRS, which generally tracks IFRS) 11 4. Accounting Disclosures (3 of 3) IFRS IAS 16: PP&E to be measured at cost, subsequently measured using a cost or revaluation model IAS 36: requires that assets are not carried at more than their recoverable amount IAS 37: outlines accounting for provisions, together with contingent assets and contingent liabilities; loss must be more likely than not to be recognized IFRS 3: applies the acquisition method to business combinations, and includes the recognition of associated contingent liabilities under the more likely than not standard U.S. GAAP ASC 410: establishes accounting standards for recognition and measurement of a liability for asset retirement obligations and for the accounting for environmental
remediation liabilities ASC 450: outlines accounting requirements for contingencies; loss must be probable and reasonably estimable to be recognized ASC 460: establishes accounting requirements related to guarantees ASC 805: applies the acquisition method to business combinations, and includes the recognition of associated contingent liabilities when such liabilities are reasonably determinable Japanese and Singaporean Accounting Standards are generally considered equivalent to IFRS as adopted by the EU Under Indian Accounting Standards, contingent liabilities may only be recognized in 12 connection with a violation of law, but an issuer must also make disclosure of possible future expenses for related damages 5. Enforcement Actions/Enforcement Trends Currently, there is limited momentum in the jurisdictions surveyed toward increased enforcement of environmental and climate change disclosure requirements Notable exceptions to this trend are a series of recent cases brought by U.S. state attorneys general: Alleged failure to disclose material environmental issues under the Martin Act, a New York State law which empowers the Attorney General of the State of New York (NY AG) to require any person that appear[s] to be acting fraudulently in the offering or sale of securities to furnish the NY AG with a statement of all the facts and circumstances concerning the subject matter which he believes it is to the public interest to investigate In September 2007, the NY AG issued subpoenas to four publicly traded power companies and a publicly traded coal company about the sufficiency of climate change disclosure in their filings. Specifically, the NY AG noted that the companies 2006 annual reports failed to include projected carbon dioxide emissions, strategies to reduce such emissions and an
assessment of the effect of future green house gas regulations. Four of the five companies have reached settlement agreements with the NY AGs office, most recently Peabody Energy in November 2015 In November 2015, the NY AG announced an investigation into inconsistencies between statements Exxon Mobil made about climate risks and its own research on the subject. The investigation focuses on whether Exxon Mobil deceived investors when it described the effects of climate change as uncertain despite internal reports which are alleged to reveal the negative impact climate change would have on the company. 19 A similar investigation was announced in California in January 2016. 20 Between 2002 and 2007, the SEC brought a series of four actions alleging that the defendant companies had improperly engaged in accounting practices related to environmental reserves, including allegations that the companies used reserves to hide losses for which no reserves had 13 been established and/or to smooth or inflate earnings Looking Ahead Finalized in December 2015, the Paris Agreement commits participants to cut carbon emissions and report progress to the United Nations as part of the goal of maintaining global temperature levels to below 2C above pre-industrial levels and pursuing efforts to limit temperature levels to 1.5C above pre-industrial levels21 While the Paris Agreement relies on implementation of voluntary plans by individual governments, it may have an impact on environmental and climate change disclosure requirements, including: changes to existing environmental and climate change laws and regulations enhanced disclosure requirements, either explicitly or implicitly as a result of more stringent environmental or climate change regulations and enforcement changes in both the levels of enforcement and the areas of focus Of note, guidance on climate change disclosure provided by the U.S. SEC in 2010, well before the Paris Agreement, advises public companies to consider, and disclose when material, the impact on their business of 14 treaties or international accords relating to climate change Contact Information (1 of 2) Country Law Firm
Sweden Mannheimer Swartling Thomas Wallinder [email protected] Turkey etinkaya Avukatlk Ortakl Halide etinkaya Ylmaz [email protected] United Kingdom Slaughter & May John Papanichola [email protected] dmay.com United States Debevoise & Plimpton Paul Rodel [email protected] 16 Endnotes 1. Argentina, Brazil, China, Canada, Denmark, India, the United Kingdom and the United States 2. Brazil, Denmark, Finland, India, Russia, Turkey and the United Kingdom
3. Argentina, China, Denmark, Finland and Sweden 4. Turkey and the EU respondents 5. The Bahamas, Chile, Colombia, Japan and Singapore 6. The Bahamas (as part of a material change report), Hungary and Japan 7. Argentina, Austria, the Bahamas, Canada, Chile, China, Colombia, Denmark, Finland, Germany, India, Ireland, Italy, Norway, Poland, Russia, Singapore, Spain, Sweden, Turkey, the United Kingdom and the United States 8. Austria, the Bahamas, Canada, China, Denmark, Finland, Germany, India, Ireland, Italy, Poland, Singapore, Spain, Sweden, the United Kingdom and the United States 9. Argentina, Austria, the Bahamas, Brazil, Canada, Chile, China, Finland, Germany, India, Ireland, Italy, Norway, Poland, Russia, Singapore, Spain, Sweden, Turkey, the United Kingdom and the United States 10. Denmark, India, Norway and Singapore 11. Argentina, Austria, Brazil, Germany and India 12. Argentina 13. Canada
14. India and Russia 15. Canada and Spain 16. Canada and Spain 17. Hungary 18. Argentina, the Bahamas, Brazil, Chile, China, Colombia, India, Japan, Russia, Singapore, Turkey and the EU respondents 19. http://www.nytimes.com/2015/11/06/science/exxon-mobil-under-investigation-in-new-york-over-climate-statements.html?_r=0 20. http://www.latimes.com/business/la-fi-exxon-global-warming-20160120-story.html 21. For a full text of the Paris Agreement, see http://unfccc.int/documentation/documents/advanced_search/items/6911.php?priref=600008831. 17
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