U.S. Agency Pushes Corporations to Disclose Climate Risks

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The U.S. agency responsible for regulating stock exchanges and securities markets issued new guidance on Wednesday to clarify what climate-related information publicly traded companies should disclose. The guidance, while not a new legal requirement, may result in corporations more consistently disclosing greenhouse gas emission inventories and climate risk analyses. 

The U.S. Securities and Exchange Commission voted 3-2 to clarify that environmental compliance requirements, environmental risks, and potential future regulations, as well as how these developments may affect business operations and profitability, should be included in annual filings to the SEC. Such filings form the basis of many investment decisions.

"The discussions, debates, and decisions that are taking place in the U.S. and elsewhere on [climate change] have implications under our existing, long-standing disclosure rules," said SEC Chairwoman Mary Schapiro. "A company must evaluate the impact it would have on the company's liquidity, capital resources, or results of operations, and disclose to shareholders when that potential impact will be material. Similarly, a company must disclose the significant risks that it faces, whether those risks are due to increased competition or severe weather."

Despite current regulations that require corporate disclosure of environmental risks, companies have inconsistently reported climate change impacts on their businesses. The Center for Energy and Environmental Security, Ceres, and Environmental Defense Fund (EDF) reviewed more than 6,000 SEC filings by S&P500 companies from 1995-2008. The study was unable to find the words "climate change" in 76.3 percent of the reports filed in 2008, and only 5.5 percent of reports detailed any strategy for managing climate-related risks such as water scarcity or sea-level rise.

While the clarification does not require that companies disclose carbon footprints or emission reduction strategies, commissioners made clear that companies should become more transparent about their greenhouse gas contributions and climate impacts. "I strongly request that, across the board, our filers step up their disclosure efforts immediately in light of our most recent guidance," said SEC Commissioner Elisse Walter.

Ceres, EDF, and more than a dozen investors, including the California Public Employees Retirement System (CalPERS), California State Teachers' Retirement System, and New York State Common Retirement Fund, petitioned the SEC in 2007 to issue the disclosure guidance.

"Investors have a fundamental right to know which companies are well positioned for the future and which are not," said Anne Stausboll, CalPERS chief executive officer, in a statement on Wednesday.

SEC Commissioners Kathleen Casey and Troy Paredes voted against the interpretive guidance. Both said that the requests for information related to "reputational damages" and "physical effects of climate change" may confuse investors and overwhelm them with unnecessary information.

Casey also expressed doubt about the scientific consensus of human-caused climate change and suggested that the SEC ruling served the "environmental lobby" more than investors. "As we begin to emerge from the worst financial crisis in generations, our consideration of this release today sends a curious signal to the investment community about what we view as the most pressing issues facing the commission," she said.

Commissioner Luis Aguilar, on the other hand, said that more information about climate-related impacts should help businesses and investors profit. When companies are uncertain about whether a climate-related regulation or environmental change constitutes a "material risk," he suggested that they lean toward disclosure. "Doubts should be resolved in favor of the investors," he said.

Ben Block is a staff writer with the Worldwatch Institute. He can be reached at bblock@worldwatch.org.

For permission to republish this article, please contact Juli Diamond at jdiamond@worldwatch.org.