SEC wants climate risks disclosed

February 9, 2010


— Kathy Nieland is U.S. Sustainability and Climate Change leader for global accounting and advisory firm PricewaterhouseCoopers. She also serves on the independent, not-for-profit Carbon Disclosure Project. The views expressed are her own. —

If you think the Securities and Exchange Commission’s new interpretative guidance on disclosing the risks of climate change applies only to big polluters, think again.

The guidance is evidence that the SEC views climate change as among the potential business risks that companies should evaluate and disclose.

It clarifies that public companies will need to evaluate the potential material impact of legislation, regulation and international accords related to climate change. Companies in every industry will need to use this guidance and make a determination if climate change poses material risks to their supply chains, distribution networks and physical assets. This may include, but is not limited to, severe weather events, scarcer water supplies and changes in demand for resources such as heating fuel, for example.

This means chocolate companies will have to assess the impact of climate change on cocoa bean production, clothing apparel manufacturers will have to look at the effect on cotton crops and financial services firms will have to evaluate the impact on their lending portfolios.

Indeed, industries of all kinds must assess the potential impact of climate change — or any environmental occurrence — on the condition and availability of the raw materials and natural resources on which their businesses depend.

Given the nature of what companies will need to evaluate, they may have to turn to outside experts for help in parsing out the known risk factors from the unknowns. This will give management the basis they need to evaluate their disclosure requirements.

For example, some companies may seek out scientists who specialize in biodiversity issues or others may ask a team of political scientists and environmental engineers to help them identify how mandates to limit or reduce greenhouse gas emissions should change their assumptions about risk. Implications on the supply chain, in particular, will present challenges for almost every company.

After evaluating the risks, companies may decide that they aren’t material and that they don’t need to be disclosed, but it won’t be just a point-in-time inventory. Companies will need to figure out how to monitor these risks going forward and adjust their need for disclosure accordingly. This is beyond what most companies are doing now. Companies that already participate in voluntary disclosure programs like the Carbon Disclosure Project already practice some level of monitoring climate-related risk, but the level of disclosure varies widely among companies.

By making it clear that climate-related disclosures are required under federal securities law, the SEC is raising the stakes for officials at public companies who have been under pressure from investors to make these disclosures.

The SEC is now putting public company officials on notice that they expect analysis that is robust and that corporate financial reporting should reflect this, if material. For public companies, even those that are not big polluters, the issues of climate change could still have an impact on their business. The bottom line is that all public filers will need to do some regular evaluation of the impact of climate change and determine what type of disclosure, if any, is required.

Photo shows the headquarters of the U.S. Securities and Exchange Commission in Washington, July 6, 2009. REUTERS/Jim Bourg

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