SEC Outlines the ABCs of Climate Change Disclosure

As the Securities and Exchange Commission edges closer to requiring corporations to disclose information related to climate change, the agency has provided companies with a sample letter to give them a better idea of what their future interactions may look like.

The new disclosure requirements stem from the belated application of guidance first issued way back in 2010. That guidance called for disclosure regarding the physical impact of climate change on companies’ businesses, such as threats to hard assets; how environmental legislation and regulation could affect operations and strategies; and potential indirect consequences from regulation or eco-friendly trends. Although not exhaustive, the questions and requests described in the new sample letter to hypothetical company “ABC Corporation” offer a handful of key takeaways for companies as they prepare to make their own climate change disclosures.

Expanding on CSR

In terms of the general presentation of information, the sample points out that ABC’s corporate social responsibility report contains more information than its filing with the SEC. Those familiar with trends in CSR (including, of course, those who read our recent report on ESG disclosure) will know this type of situation can happen. Some companies seemingly put as much effort into their CSR reports now as their annual statements.

Risks to Business

The SEC wants to know about companies’ risks from climate change. These risks can take any number of forms. For example, does climate change make your company a credit risk? There are also threats posed by competitors who use more environmentally friendly technologies. And could the company face litigation stemming from climate-related issues?

Policy Problems?

Clearly, the policy landscape is evolving rapidly in the United States and abroad as governments at all levels look for ways to cut emissions. The SEC points out in the sample letter that it expects to see a robust discussion about how pending legislation and rulemaking could affect ABC’s business and operations.

New Costs

If corporations are taking on new costs to finance green projects, the SEC wants to see them in the reporting. Vague statements such as “We’re putting solar-power units on all of our buildings” won’t cut it, either. The agency wants to know amounts for material climate-related expenditures.

Indirect Consequences

Not all effects of climate change initiatives are self-evident. For example, if a competitor’s products or services are considered more sustainable than what ABC is selling, it puts ABC at risk. Similarly, some companies take on reputational risks if their products produce significant carbon emissions.

Getting Physical

Climate change isn’t theoretical: Some companies already are seeing the adverse physical effects of environmental degradation. Consider hotel operators with properties on the beach, for instance.

We also wrote over the summer about the looming threat to businesses posed by water scarcity, which could soon begin to hurt sectors such as agribusiness and consumer products. Sounds like something worth mentioning in your corporate climate disclosures.

Compliance Costs

Simple enough: How have climate change and related issues affected companies’ compliance costs, if at all?

Carbon Credits

Some companies have addressed their carbon footprints by buying and selling carbon credits or offsets. That fact should be disclosed, according to the SEC, along with any additional information about how the practice may impact a company.