On August 26, 2020, the Securities and Exchange Commission (SEC) finalized amendments to Regulation S-K, changing disclosure rules for environmental reporting. The amendments are the first update to Regulation S-K in over 30 years and will become effective Monday, November 9, 2020.

The amendments will change the $100,000 trigger for disclosure of actual or potential environmental penalties. Under the new rule, the trigger will be raised to at least $300,000 and can be as high as $1 million under appropriate circumstances. This may enable companies to avoid disclosing environmental penalties and litigation that they would have been required to report under the predecessor rule.

These amendments were developed as part of the SEC’s Disclosure Effectiveness Initiative.  The Initiative is designed to simplify disclosure requirements and reflect modern business practices by improving readability and enabling a more individualized approach to disclosure.

Relevant Requirements For Environmental Reporting

Item 103 – Legal Proceedings (17 CFR § 229.103)

Companies subject to SEC requirements have long been obligated to disclose environmental penalties of $100,000 or greater, pursuant to Item 103.

The SEC’s amendments raise that level to $300,000 and allow the following additional flexibility:

The registrant may select a different threshold that it determines is reasonably designed to result in disclosure of material environmental proceedings, provided that the threshold does not exceed the lesser of $1 million or one percent of the current assets of the registrant and its subsidiaries on a consolidated basis.

Item 101 – Description of Business (17 CFR § 229.101)

Under Item 101(c), registrants are required to provide a narrative description of their business, focusing on its dominant segments.

Registrants must disclose estimated capital expenditures for environmental control facilities if the expenditures are material. The material expenditures must be reported for the current fiscal year, succeeding fiscal year, and any other periods the registrant deems material.

The SEC’s amendments modify the current regulation to be less prescriptive and provide the registrant with the flexibility to determine whether expenditures are material.

The amendments also expand regulatory compliance disclosure to include compliance with all material government regulations and not just environmental laws.

Information is material if:

• there is a substantial likelihood that a reasonable investor would consider the information important in deciding how to vote or make investment decisions; and
• if there is a substantial likelihood that disclosure of an omitted fact would have been viewed by the reasonable investor as having significantly altered the “total mix” of information available.

Of note, this rule does not address issues related to climate change. In selecting its principles-based approach and providing flexibility to registrants, the SEC is leaving it to each regulated company to determine whether climate information is material.

KMCL attorneys have been tracking developments in this area. Please do not hesitate to contact KMCL if you have questions about the effects of this Rule change.