SEC Calls for Disclosure of Climate Risks


The Securities and Exchange Commission voted Wednesday to urge public companies to inform investors about the potential risks that climate change and climate policy present to their business — the latest victory for advocates of greater transparency when it comes to corporate carbon footprints. The vote, split 3-2 on party lines, has triggered the SEC to provide not new regulations, but rather “interpretive guidance on existing SEC disclosure requirements as they apply to business or legal developments relating to the issue of climate change.”

As the SEC explains in its release, existing rules cover a company’s risk factors, and call for management discussion and analysis. The new guidance on those rules emphasizes that when assessing potential risks, companies should consider the impact of international climate accords and treaties, pending climate legislation and a possible uptick in demand for goods that result in lower emissions.

If and when companies determine that these factors (or factors ranging from new licensing requirements to severe weather, SEC Chairwoman Mary Schapiro noted in her statement at yesterday’s meeting) could have a material effect on their business, then they’re required to disclose the risk to shareholders.

This week’s vote and resulting guidance comes just a few months after the SEC opened the door for a climate reporting crackdown. After a decision handed down in late October 2009, the commission said it would start considering on a case-by-case basis shareholder requests for disclosure of financial risks related to environmental and social issues, including climate change. Prior to the decision, the SEC allowed companies to reject these demands as “no-action requests,” reasoning that such risks were part of ordinary business operations and therefore not open to a shareholder vote.

Without the nudge from the SEC, some companies have already made strides toward transparency, and some investors have successfully pushed firms to develop climate strategies or set greenhouse gas reduction goals. But according to a pair of reports released last year from Ceres, the Environmental Defense Fund and the Center for Energy and Environmental Security, despite movement in this direction (see the above chart depicting trends in mentions of climate change in earnings reports), climate-related disclosure “continues to be weak or altogether nonexistent in SEC filings of global companies with the most at stake in preparing for a low-carbon global economy.”


Santiago A. Cueto

The SEC’s involvement in climate change regulation drives the federal government deeper into the climate debate, potentially reshaping management decisions at companies across the country and the world. It won’t be long before securities regulators in other nations to issue their own climate change directives in the very near future.
It’s about time that international environmental issues are put on the national agenda. This is also good for investors. This paves the way for the development of a consistent standard for companies to report climate risk that will help all investors make better-informed decisions. This was the subject of an article on the International Business Law Advisor

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