On 27 January 2010 the Securities and Exchange Commission (the “SEC”) voted to provide public companies with interpretative guidance on existing SEC disclosure requirements as they apply to business and legal developments relating to climate change risks. The new guidance is designed to complement existing disclosure rules that require companies to disclose the impact that legal and economic developments related to climate change may have on their business. In this article we consider briefly the growing consensus among companies and regulators on the need for improved and harmonised disclosure practices relating to climate change issues.
SEC Climate Change Disclosure Guidance
The new SEC Guidance is designed to meet repeated demands of shareholders and investors who are beginning to consider climate change risks as material in investment decisions. In the US, Federal securities laws and SEC regulations require certain disclosures by public companies for the benefit of investors. Occasionally, to assist those who provide such disclosures, the SEC provides guidance on how to interpret the disclosure rules on topics of interest to the business and investment communities. The SEC's interpretive releases do not create new legal requirements nor modify existing ones, but are intended to provide clarity and enhance consistency for public companies and their investors.
The new interpretative Guidance encourages companies to weigh the impact of climate-change laws and regulations when assessing what information to include in corporate filings. The relevant rules in the Guidance cover a company’s risk factors, business description, legal proceedings, and management discussion and analysis. Examples of where, according to the Guidance, climate change may trigger disclosure requirements include the following considerations:
1. Whether the impact of certain existing laws and regulations regarding climate change is material. In certain circumstances, the potential impact of pending legislation and regulation should be evaluated.
2. The risks or effects on its business of international accords and treaties relating to climate change.
3. Indirect Consequences of Regulation or Business Trends: Legal, technological, political and scientific developments regarding climate change may create new opportunities or risks for companies. For instance, decreased demand for goods that produce significant greenhouse gas emissions or increased demand for goods that result in lower emissions than competing products. As such, a company should consider, for disclosure purposes, the actual or potential indirect consequences it may face due to climate change related regulatory or business trends.
4. Physical Impacts of Climate Change: Companies should also evaluate for disclosure purposes the actual and potential material impacts of environment matters on their business.
Earlier, in October 2009, the SEC also issued new staff guidance for investors filing shareholder resolutions to seek express information from companies on bottom-line risks they face from climate change and other environmental and social issues, click here to view.
UK developments on climate change risks disclosure
In the UK there is also growing scrutiny of how climate change and environment issues are managed and reported.
1. The Companies Act 2006 (the “Act”)
The Act requires directors to carry out their duties in a way which is most likely to promote the success of the company for the benefit of its members as a whole. The Act also obliges most companies to produce a business review. Directors of listed companies must understand the likely consequences of any decision in the long-term and disclose the main trends and factors likely to affect the future development, performance or position of the company’s business in their business review. Large quoted companies must also report on environmental risks, policies and key performance indicators (KPIs). Environmental risks encompass a wide range of issues, not purely climate change although climate change may be an inherent factor. In order to assist with the reporting process the Accounting Standards Board has issued a statement of best practice and DEFRA has issued guidance on KPIs.
2. Recent Guidance for Auditors
In September 2009 the Environment Agency and the Institute of Chartered Accountants for England and Wales (ICAEW) launched new guidance on annual reporting in annual financial statements, entitled “Turning Questions into Answers: Environmental Issues and Annual Financial Reporting 2009”. The report provides guidance to assist preparers, users and auditors of annual financial statements to identify sufficiently relevant environmental issues, which affect company financials warranting disclosure. The aim being that the disclosure of management policies relating to environment matters and companies’ corporate commitment to these issues will assist in avoiding financial risks and prompt internal change. The report is expected to be of interest to directors and users of annual reports in addition to auditors. The guidance is accessible here
Whilst particular obligations are placed by the Act on large and quoted companies to report on environment related risks, policies and KPIs, the report advocates voluntary reporting for all companies in excess of the required standards in order to generate information on environment performance.
3. Calls for harmonised climate change disclosure framework
The ICAEW, the Climate Disclosure Standards Board and Prince’s Accounting for Sustainability Project and others including 12 accountancy institutes from around the world have called for a single set of universally accepted standards for climate change related disclosures in mainstream financial reports.
In 2009 the Climate Disclosure Standards Board (CDSB) consulted on a Draft Reporting Framework designed for companies to use in evaluating the type and extent of disclosures that should be made about climate change in their mainstream reports. The Framework is to apply to disclosures made in or connected to information provided outside financial statements - such as the business review - that assists in the interpretation of a complete set of financial statements or improved users’ ability to make efficient economic decisions. A response to the public consultation is expected in the first quarter of 2010. (CDSB’s work programme is managed by the Carbon Disclosure Project which acts as Secretariat to CDSB.) Click here for more information
Ceres report on survey of asset managers practices
A recent report by Ceres entitled “Investors Analyze Climate Risks and Opportunities: A Survey of Asset Managers Practices” (January 2010) is also of significance. The report is the result of a survey conducted in 2009 of the world’s 500 largest asset managers asking them to describe how they are considering climate risks in short and long-term decisions. The report examines best practices that asset managers are using to incorporate climate and environment risks into their due diligence, corporate governance and portfolio valuation. The key findings reveal that many companies are still developing protocols for reporting on their carbon emissions and the risks and opportunities that they face. Whilst these disclosures are more prevalent, they are still voluntary and lack consistency.
The report notes that five of the world’s largest financial institutions have adopted the Carbon Principles, a roadmap for banks and utilities to evaluate and mitigate climate risks in lending to electricity generation projects. These financing entities acted out of concern about long-term viability of high-emission electricity generation. This means that the Carbon Principles initiative could increase the cost of financing high-emission enterprises if lenders demand more favourable terms to compensate them for potential liability, or if they simply avoid financing high-emitting projects. Ceres identifies that utilities that are investing in energy efficiency and cleaner renewable energy may not only face fewer material risks related to climate change regulation, but may also benefit from lower financing costs and higher market share, as emission regulations and renewable portfolio standards take effect.
Conclusion
Increasingly climate change impacts, sustainability issues and environmental compliance are being considered in making investment decisions. The emergence of new guidance on requirements for disclosures on climate change risks is indicative of heightened awareness of how environment related legislation, policy and risks should be factored into business decision making in a cohesive way. More developments in this area should be expected.
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