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Most U.S. Companies Ignoring SEC Rule to Disclose Climate Risks

Only 27 percent of publicly traded companies even mention 'climate change' in their annual reports, finds new data.

Sep 19, 2013
Traders work on the floor of the New York Stock Exchange.

Almost 75 percent of the nation's publicly traded companies are ignoring a three-year-old Securities and Exchange Commission requirement that they inform investors of the risks that climate change may pose to their bottom lines, according to a citizen researcher who has compiled what may be the country's biggest searchable database of climate risk disclosure.

The data, culled from the annual reports of 3,895 U.S. public companies listed on major stock exchanges, found that only 27 percent mentioned "climate change" or "global warming" in their most recent filing. Annual reports are the primary vehicle for companies to reveal to shareholders business risks and any other challenges they face.

The tally is the work of Lawrence Taylor, a 72-year-old retired database developer and entrepreneur, who said he has been following climate science and politics and felt compelled to do something about it. Sizing up corporations seemed a good place to start, he said.

"Companies have a huge impact on climate," said Taylor, who lives in San Diego. "They are the highest consumers." For nearly 20 years of his career, Taylor assessed air pollution data for the Orange County and San Diego land planning departments.

The data supports the findings of other studies that have shown that most companies are not mentioning climate change in their financial reports, and that when they do they use vague boilerplate language.

It is "consistent with our analysis" of annual reports, said Jean Rogers, executive director of the Sustainability Accounting Standards Board (SASB), a non-profit group developing sustainability disclosure standards for SEC filings. In 2011, Rogers co-authored a study in the Journal of Applied Corporate Finance that looked at 48 companies' annual reports across six industries.

"Companies have a huge impact on climate," says Lawrence Taylor."Companies have a huge impact on climate," says Lawrence Taylor.

Taylor's work is likely the most comprehensive attempt to size up whether and to what extent companies disclosed climate risks during a given year. He said it took him 1,100 hours over five months to manually search the documents on the SEC website and to organize the data into a searchable database that would allow interested people to easily compare the risks.

Of the 1,050 businesses that acknowledged climate change, few disclosed real specifics, Taylor found. About 70 percent of these companies mentioned that their operating costs might be affected by existing and pending rules limiting carbon dioxide emissions, such as the Environmental Protection Agency's greenhouse gas regulations. Far fewer discussed how their businesses would be financially affected by the physical impacts of global warming, such as from higher insurance claims due to extreme weather or rising sea levels.

Taylor looked at the reports of companies in about two dozen sectors, ranging from energy to insurance to real estate. The worst offenders were in banking, education, recreation and personal services. Companies in carbon-intensive sectors, such as oil, gas and coal, were the most apt to report on climate change. 

Nearly all of the 179 energy companies Taylor reviewed mentioned climate change. But even they underreported their climate risks, especially given how vulnerable they are to air pollution and carbon emissions policies. According to a report by banking giant HSBC, major firms like BP and Shell could lose up to 60 percent of their market values if countries pass tough carbon regulations that force oil giants to keep some of their fossil reserves in the ground.

Most energy companies focused on the general cost impact from greenhouse gas emission regulations, but few gave actual figures. Less than a quarter mentioned the physical impacts that climate change could have on their assets and operations, such as potential flooding at coastal oil and gas sites.

For instance, ExxonMobil Corporation, one of the world's largest oil companies, wrote in its 2012 annual report that carbon trading and taxes, among other policies, could "make our products more expensive, lengthen project implementation times, and reduce demand for hydrocarbons, as well as shift hydrocarbon demand towards relatively lower-carbon sources such as natural gas." Exxon did mention possible physical impacts from hurricanes, but didn't explicitly mention global warming.

In January 2010, the Securities and Exchange Commission voted to require all public companies operating in the United States to disclose financial risks and rewards associated with climate change in their filing documents. The SEC wrote binding climate-risk guidance to help companies decide when and whether to reveal climate matters. Under the guidance, companies have to disclose any potential earnings impacts from greenhouse gas emissions laws and regulations, international accords and climate-related lawsuits and business opportunities, as well as from physical impacts.

The guidance was a powerful signal "that climate change is the same as any other financial risks that companies must disclose," said Jim Coburn, senior manager of investor programs at Ceres, a Boston-based coalition of investors and environmental groups.

However, since then, the SEC has "not put much focus into implementing the guidance," Coburn said.

The toughest penalty for not properly including this information in an annual report is requiring a company to rewrite the report. This penalty is rarely enforced, according to Coburn. More commonly, the SEC sends a comment letter requesting more information on the topic in the following year, if it does anything at all.

The SEC did not respond to requests about how it handles lax disclosure on climate change.

Apple Inc. and Amazon were among the biggest companies identified by Taylor that did not report on climate change in their annual reports. Both companies declined to comment.

Ceres said it plans to release a database later this year comparing how thousands of companies are disclosing climate risk in various financial documents. It will also release a report analyzing three years' worth of SEC comment letters showing how the commission enforced the climate-risk guidance, among other environmental reporting requirements.

For his part, Taylor said he is working to make his database more user-friendly. He plans to publish it on his website, DecisionFacts.org, in the coming months.

He hopes climate activists will use the information to encourage companies to take climate action.

"The role of this [project] is simply one more little piece of information to help people do some good on the issue of climate change," he said.

Clarification: An earlier version of this story said the Sustainability Accounting Standards Board (SASB) published a study in 2011 that looked at 48 companies' annual reports across six industries. The study was co-authored by Jean Rogers, now SASB's executive director, and published in the Journal of Applied Corporate Finance before SASB's official creation.

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