The U.S. SEC’s decision at the end of January to release interpretative guidance on corporate climate risk disclosure unleashed an impressively diverse maelstrom of articles, briefs, and alerts. Simultaneously, legal, financial, and policy analysts seized on the release and scoured the SEC document for hints regarding the shape of the SEC’s new climate risk regime.
Now, more than a month after the release of the interpretative guidance, let’s take a look at the SEC tealeaves that had so many, commentators and professionals alike, chomping at the bit.
To start, the SEC’s guidance is just that: guidance. While guidance in this context may have broader implications and deeper meaning, as it is a fairly rare that the SEC issues such guidelines (only 22 releases since 2000 reckons law firm Van Ness Feldman’s legal research), it is still guidance. In more straightforward terms, no disclosure requirements have been created or amended, but rather the SEC has now formally opined in some detail as to how climate risks should be incorporated into existing corporate disclosures. Indeed, as is the name of the game with risk disclosures, much hinges on implementation. “Material risk,” the guiding principle at the center of disclosure is as slippery as ever, and while the guidance preaches precaution with respect to climate risks, there is significant room for debate on the required precision of such disclosures.
Two fairly straightforward concepts to remember are: i) the fundamental purpose of financial disclosures and ii) the methods of recourse that push companies to make these disclosures. That is, disclosures are required as a means by which to provide investors with foresight on potential risks and opportunities, a concept that is buttressed by the potential for litigation against companies failing to make reasonable disclosures.
But as with so much in climate change policy, the devil is in the details and minutiae of implementation. Getting into some specificity, the SEC guidance explicitly outlines four separate risk areas requiring attention and offers some accompanying direction:
A. Impact of Legislation and Regulation. Perhaps the most obvious and immediate risk factors emanate from the potential impacts and opportunities generated by climate policy and associated regulation. The SEC does not mince its words here, stating that registrants “should consider specific risks they face as a result of climate change legislation or regulation and avoid generic risk factor disclosure that could apply to any company.” The guidance goes on to advise companies to undertake policy, risk, and operational analysis at a number of levels: evaluating the likelihood of pending regulation and assessing the material impact of the regulation on the registrant’s operations and financial condition, tempering a given analysis with the anticipated “difficulties involved in assessing the timing and effect of the pending legislation or regulation.”
B. International Accords. Part and parcel to domestic regulatory developments, the SEC also notes the potential impacts of international climate negotiations on business operations and disclosure requirements. Given the effective similarity to domestic regulation, the SEC’s comments in this section refer directly to their comments on legislation, yet it is worth noting the inclusion of the international dimension.
C. Indirect Consequences of Regulation or Business Trends. Taking a market-wide view of the applied impacts of climate change regulation as well as tipping its organizational cap to the case for corporate social responsibility, the SEC outlines indirect consequences and opportunities presented by climate change. Specifically, the SEC runs through a laundry list of shifts in supply and demand for goods and services on the basis of their carbon content or ability to innovate towards a new carbon economy. But the SEC’s commentary does not stop at traditional supply and demand curves. Extending to the realm of reputation, the SEC advises registrants to consider the marketplace of public opinion: “a registrant may have to consider whether the public’s perception of any publicly available data relating to its greenhouse gas emissions could expose it to potential adverse consequences to its business operations or financial condition resulting from reputational damage.”
D. Physical Impacts of Climate Change. Finally, citing a GAO statistic on the magnitude of weather impacts on business (“88% of all property losses paid out by insurers between 1980 and 2005 were weather related”), the SEC introduces the importance of assessing business vulnerabilities to “severe weather or climate related events.”
As outlined, the reach of the SEC’s guidance represents a new era of climate risk disclosure and indeed one that the corporate world is not necessarily well-prepared to embrace. The GHG Management Institute’s own survey data have shown that institutional capacity to simply measure, report, and verify corporate GHG emissions — let alone developed nuanced risk assessments of associated policy impacts — is disconcerting inadequate.
With so much ground to make up, our recommended first steps echo the SEC’s guidance. Drawing specific reference to three voluntary reporting regimes — The Climate Registry (TCR), the Carbon Disclosure Project (CDP), and the Global Reporting Initiative (GRI) — the SEC explicitly highlights the overlapping value reporting to these programs offers: “Although much of this reporting is provided voluntarily, registrants should be aware that some of the information they may be reporting pursuant to these mechanisms also may be required to be disclosed in filings made with the Commission pursuant to existing disclosure requirements.”
As a capacity building organization partnered with both TCR and the CDP, the Institute provides training in support of both programs.
Click here to learn more about climate risk through the framework of the Carbon Disclosure Project questionnaire.
Similarly, click here to learn more about our partnership with The Climate Registry and the associated coursework: The Basics of Organizational GHG Accounting and GHG Verification of Inventories and Projects.
Finally, for more on the SEC’s interpretative guidance please click here to sign up for “Climate Change Disclosure: Origins and implications of the SEC guidance and beyond” on March 31st, a webinar on the topic delivered by Dr. Julie Fox Gorte of PaxWorld Funds. (Available at no charge to premium members.)