CCES News For You

Feb. 9, 2010
Well, you thought there were enough climate change forces on your company between public perception, business benefits, and potential (and actual) regulations. Now, there’s a new force: disclosure of climate change risk and potential effects on company business. On Feb. 2, 2010, the Securities and Exchange Commission (SEC) published an interpretive guidance for public companies on disclosure requirements applied to business/legal developments related to climate change.
Why Disclose Climate Change Risks?
SEC regulations require certain disclosures of facts and risks by public companies so that investors have fair, up-to-date information to guide their investment decisions (“level playing field”). The agency provides guidance for public companies about risk disclosure on topics of interest for clarity.
Some op-ed writers have criticized the SEC’s decision, attacking the concept of climate change. The new SEC interpretive release does not provide an opinion about its validity or causes, but provides guidance pertaining to disclosing potential impacts of climate change-related matters on its business, such as regulations. For example, climate change regulations can impact a business even if climate change is eventually “proven” false, necessitating disclosure to potential investors. According to SEC Chair Mary Schapiro, “These principles of materiality form the bedrock of our disclosure framework.”
New Climate Change Disclosure Requirements
The SEC recently posted the interpretative guidance (http://www.sec.gov./rules/interp/2010/33-9106.pdf), acknowledging the large amount of data about climate change risk outside of disclosure documents.
The SEC is using current disclosure requirements of environmental and business risks as a model applied to climate change. The document requires public companies to assess and disclose whether:
• any enacted or pending climate change regulation may have a material effect on the company’s financial condition, including costs to comply with rules and potential carbon credit revenues;
• there are potential changes to the company’s financial condition arising from changing demand for the company’s goods and services arising directly from regulation (i.e., cost pass throughs);
• there are indirect effects on finances due to climate change-contributed changes in consumer demand (i.e., increased demand for lower GHG-emitting products); and
• physical risk related to climate change (i.e., damage to facilities on coastlines, disruptions of major suppliers and customers because of severe weather, increased insurance premiums and deductibles, and decreased agricultural production) may have a material effect on company.
What Is Climate Change Risk? How Does It Affect Your Company?
There are many aspects of climate change that can have an impact on a company’s business, such as how it performs operations, product manufacturing and sales, and general corporate strategy.
Business Operations: The prevailing view of scientists in the field is that climate change will raise the magnitude, frequency and impacts of extreme weather events. If a business operates a key manufacturing plant in an area vulnerable to hurricanes, there is a greater risk of more frequent, powerful storms affecting operations or transportation. What is the effect on a company’s stock price if a storm knocks out production or transportation of a product for some time such that it cannot be brought to market? What if the plant in question is owned by another company, but it is a key raw material? Example: a European firm completed a climate change risk analysis and concluded that they will need to gradually shift the farming of a key ingredient to areas further north than currently farmed because the current farms may no longer be able to grow the product because of warming trends. The firm is currently changing their contract language to allow shifting of farming locations.
Regulatory/Policy Changes: It is important to understand potential future climate change rules and capitalize on the industry’s unique needs to lessen its blow or even profit by them. New climate change rules will impact business decisions. Example: a number of firms that participate in the Chicago Climate Exchange state they do so for low-cost “practice” in terms of how to maintain a GHG emission reduction program and to strategize on how to reduce emissions and buy or sell credits.
Market Risks: Physical climate change risk and the growing climate change movement will likely impact broader business areas, such as customer demand, supplier costs, and product development. Example: If the predicted increases in temperatures, drought, and public health issues occur, how will that change consumer tastes? May there be a long-term decrease in global sales of items such as cosmetics? May there be an increase in demand for items such as medicines and bottled water?
Corporate Strategy: Manage risks (and opportunities) in GHG reductions, prioritize initiatives, and communicate concern and progress to gain the greatest possible benefits of stakeholders, such as the public and governments. Example: Toyota and IBM have taken advantage of the global concern about climate change to sell new or repackaged products centered around environmental concerns.
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