SEC Issues Guidance to Companies: Climate Change Has Material Consequences

Jun 10, 2010   //   by Melinda Owens   //   Accounting & Finance, Regulation  //  No Comments

SEC rules that climate risk is material informationIf a paradigm shifts in corporate reporting, would your company or shareholders notice? On January 27, 2010, the Securities and Exchange Commission (SEC) issued guidelines to encourage public companies to disclose climate-related issues facing their business.

BusinessEarth has long believed that significant and sustainable changes will only occur when environmental and social impacts are reflected in a company’s bottom line. With the SEC’s guidelines, we are one step closer to seeing if this is the case.

The SEC has always required companies to evaluate the impact that financial and legal risks have on their liquidity, capital resources, or results of operations, and disclose the risks if material. Until recently, climate risk was viewed as either too remote or too uncertain to disclose. With the new guidelines issued, we should begin to see climate risk being discussed in more SEC filings.

What is Climate Risk for Companies?

Specifically, the SEC’s interpretative guidance highlights the following areas as examples of where climate change may trigger disclosure requirements:

  • Impact of Legislation and Regulation: Will climate related laws and regulations such as the Waxman-Markey energy/climate bill impact your business in a material way?
  • Impact of International Accords: Are there international laws, such as the Kyoto Protocol, that will materially affect your operations?
  • Indirect Consequences of Regulation or Business Trends: Will failure to lower your emissions reduce customer demand for your product?
  • Physical Impacts of Climate Change: Will the effects of climate change limit your ability to source raw materials, invest in infrastructure, etc…?

What Gets Measured Gets Managed

The relevance of climate risk has expanded from investors with moral or policy interest to investors with a financial interest. A company’s financial condition could depend upon its ability to avoid climate risk and to capitalize on new business opportunities by responding to the changing physical and regulatory environment.

King Coal and Climate Regulations

The coal industry demonstrates the risks and impact companies can face from emerging and expected climate regulations. On July 25, 2007, a front page Wall Street Journal article Coal’s Doubters Block New Wave of Power Plants spotlighted the increasing difficulty of building coal-fired generation. The article pointed to proposals for new coal-fired power plants in Texas, Florida, North Carolina, Oregon and Minnesota that have been cancelled because

“States have concluded that conventional coal plants are too dirty to build.” The article reported that “the rapid shift away from coal shows how quickly and powerfully environmental concerns, and the costs associated with eradicating them, have changed matters for the power industry”.

In a search of SEC 10K filings over the past year (May 2009 – May 2010), we were shocked to find that only six companies mentioned the phrase “Climate Risk”.  With the April 2010 BP oil spill in the Gulf of Mexico on everyone’s minds, it makes us wonder, what will BP and other oil companies disclose in upcoming SEC filings?  Do you think that companies will provide more disclosures or will companies ignore the issued guidelines? After the dramatic drop in BP stock, shareholders may leave public companies no choice but to disclose more of the climate and social risk inherent in their operations.