Whether or not climate change is real, pressure from investors and regulators may lead companies to increase their SEC disclosures about climate change risk and cap and trade financials. What types of disclosures should investors get? How might the recent cap and trade legislation affect SEC disclosures about carbon and climate change risk? What are companies doing about these issues at the corporate governance level?
Companies Facing The Highest Climate Change Risk Disclosed Little In Their SEC Filings
The Corporate Library recently released a study on climate risk disclosures commissioned by Ceres and the Environmental Defense Fund. The report examines the disclosure of risks and opportunities in Securities and Exchange Commission filings in five industries most likely to be affected by climate change:
- electric utilities (e.g., PG&E)
- coal (e.g., Rio Tinto)
- oil and gas (e.g., Shell)
- transportation (e.g., Honda), and
- insurance (e.g., Zurich Financial).
The study evaluates company filings in three main categories: 1) emissions and positions regarding climate change, 2) risk assessment, and 3) actions concerning climate risks and opportunities.
Their analysis leads the authors to conclude: "Taken together, these findings are strong evidence that investors are not getting the information they need in SEC filings, even from industries facing clear, immediate risks from climate change." (see pg. v of report). The authors urge the SEC to require that corporations incorporate the following four factors into their disclosures:
- Total historical, current, and projected greenhouse gas emissions
- Strategic analysis of climate risk and emissions management
- Assessment of physical risks
- Analysis of risk related to the regulation of greenhouse gas emissions
Among the 100 companies investigated, 28 did not discuss risk assessment, 52 described no actions to address climate change, and 59 did not mention their carbon emissions or a position on climate change. Overall, companies in the insurance and transportation sectors provided the least information on climate issues. The authors conclude that companies will not provide adequate climate risk disclosures to investors unless the SEC mandates them.
How Cap And Trade Will Affect SEC Disclosures
In his D&O Diary blog, Kevin LaCroix argues that the cap and trade legislation recently passed by the House of Representatives, and the subsequent carbon trading, will affect the financial results of corporations. As a result, investors will want more information about a corporation's carbon risk. A June 2009 PricewaterhouseCoopers report asserts that "investors, stakeholders and regulators will demand greater transparency and comparability of companies’ financial information." LaCroix further argues that D&O insurance underwriters will care about carbon risk disclosure because of potential litigation surrounding such disclosures.
One can easily foresee shareholder derivative litigation over inadequate or deceptive disclosures. In the absence of SEC requirements and guidelines regarding carbon risk disclosure, LaCroix sees insurance underwriters developing their own standards for evaluating such disclosures. Thus, the industry at highest risk from is the insurance industry.
The Corporate Governance Of Climate Change
Beyond SEC disclosures, the more important question is whether companies are acting on climate change. A December 2008 RiskMetrics Group report commissioned by Ceres finds that a few companies across all sectors are beginning to address the issue at the product design and supply chain management levels. Wal-Mart will calculate and put a sustainability index on every product it sells.
However, few companies have implemented corporate governance structures to address climate change. Only a small minority of consumer and technology companies have created committees on the board of directors to address the issue.
Why is this happening? Many companies apparently do not perceive the risk to be significant enough to justify a large amount of the board's time. Does this issue that merits a committee on the board? Is it as important as executive compensation, or audits of the company's financial statements, or the nomination of director candidates? The thinking must be something like this: If climate change is not real, then the associated risk must not be very high. Why elevate the issue to the board level when the board has many other strategy and management issues to tackle?