In criticizing the SEC's new guidance on climate change-related disclosures, about which I blogged earlier, Megan McArdle argues that:
SEC just voted, 3-2, to offer "interpretive guidance" to companies on making public the threats posed to their business by climate change. ...
... in conditions of radical uncertainty, such disclosures could as easily be misleading as useful.
There's two problems with Megan's critique.
1. Pursuant to Item 303 of Regulation S-K, issuers are required to disclose “any known trends or any known demands, commitments, events or uncertainties that will result in or that are reasonably likely to result in," among other things, the issuer's "liquidity increasing or decreasing in any material way.” It's hard to argue with the proposition that climate change is a "known" uncertainty.
Granted, a known uncertainty only has to be disclosed if it is reasonably likely to have a material effect on a company's liquidity, financial condition or results of operations. BUT: (A) Disclosure of known trends and uncertainties includes not only those affecting the period covered by the disclosure statement but also forward-looking information about the potential impact on future liquidity, capital resources, or operating results. (B) The SEC long has made clear that it expects issuers to disclose of a known trend, future event, or uncertainty unless the issuer's management concludes that either: it is not reasonably likely the trend, event or uncertainty will occur or come to fruition; or the trend or uncertainty is not reasonably likely to have a material effect on the company's liquidity, capital resources, or results of operations. This is true even if you can't quantify the likelihood or the magnitude of the event.
I agree with McArdle that these MD&A disclosures mandated by Reg S-K can be less than helpful to investors, but that's a complaint that can be directed at all MD&A disclosures about trends and uncertainties, not just the new climate change guidance.
2. I agree with McArdle that there is a lot of uncertainty about climate change. BUT the SEC guidance is mostly concerned with the impact of possible climate change legislation on business, not the impact of climate change as a meteorological phenomenon. There's a lot less uncertainty about the prospect of some sort of regulation and/or legislation than there is about the science of global warming. Certainly, it's sufficiently of a known risk to justify disclosure.
I'm not a fan of mandated disclosure. I'm especially not a fan of the Item 303 rules. I'm not an ecomentalist. I'm somewhat skeptical about global warming. BUT I think most of the SEC's critics are ignoring the reality that there's really not all that much new here and that it could have been a lot worse.
Comments