SEC Decision Requiring Disclosure of Climate Risks Could Have Broad Impact

Polluting Industries in North America, like Oil Sands, Under New Scrutiny

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After years of pressure from investors, environmental organizations and public interest groups, the U.S. Securities and Exchange Commission voted Wednesday to require publicly traded companies to disclose information regarding business risks and opportunities related to climate change.

Some companies already take climate issues into account and disclose their findings to investors, but the "interpretative guidance" issued by the SEC will require all public firms to do so.

This is the first economy-wide requirement that companies disclose their exposure to climate-related risks, according to Ceres, an NGO that has been leading the effort to pressure the SEC to adopt such requirements.

On the day after the standards were released, opinion was divided over the impact the new standards would have, with some critics complaining that they were unnecessary. Others saw it as the start of a broader transformation that would put new pressure on major polluting industries.

SolveClimate spoke with Bob Walker, Vice President of sustainability at Northwest & Ethical Investments LP, whose investment firm has been specifically involved in calling for greater disclosure from energy companies involved in development of the Alberta oil sands.

The oil sands, or tar sands, present an interesting case study for the new SEC regulations. The oil in the Alberta reserve — the second largest in the world — is notoriously costly to extract in terms of financing as well as environmental and social damages.

In December, Walker’s firm released a report warning that oil companies are exposed to “litigious, regulatory, policy and social license risks” and that some of them are doing a poor job of disclosing that risk exposure to shareholders.

Walker says U.S. companies with projects there will now have to prepare some sort of "scenario analysis" that will take into account how a rising price of carbon will affect their projects in both the short- and long-term.

Canadian companies involved with oil sands development that are listed on the New York Stock Exchange will also be affected since they often follow SEC guidelines, though are not always required to. Walker says he hopes this announcement will cause investors to put pressure on those Canadian firms to release similar information on their exposure to climate-related risks.

Outcome of a long fight

The SEC decision stems from a series of reports and other efforts to raise awareness of the risks to investors who have put their money in companies who might be impacted by climate change.

Ceres, the Environmental Defense Fund and other investors and environment groups filed a petition requesting guidance requiring disclosure in 2007 and again in 2008 and 2009. In June, the two organizations plus The Corporate Library issued a report showing that "climate change-related disclosure continues to be weak or altogether nonexistent in SEC filings of global companies with the most at stake in preparing for a low-carbon global economy." A survey of businesses conducted by Ceres and released this month came to a similar conclusion.

Walker, whose firm is based in Toronto, characterizes the decision as "part of a global effort to require disclosure." He cites actions that the Ontario Securities Commission is beginning to take in Canada.

"As a global investor," he says, "I see it as a part of a general trend" and finds it particularly noteworthy that the pressure is coming from the investor community since governments have been slow to respond to climate-related risks.

"It is clear to us this decision does follow from the pressure of groups," Walker says, citing his own group’s efforts. Northwest signed a letter with other investment firms in July asking the SEC to require companies to report on environmental, social and corporate governance issues.

The new guidance is the latest in a string of actions on disclosure issues since Mary Schapiro was appointed by President Obama to be chairwoman of the SEC.

In October, the commission reversed a previous rule and decided to allow shareholder resolutions seeking information on the financial risks investors face from social and environmental issues, including climate change. Schapiro has also asked that a request from investors, in June, to require companies to disclose environmental, social and governance risks be considered.

She is one of three Democrats on the panel along with two Republicans, and though the vote on the climate risk disclosure was split along party lines, Shapiro emphasized afterward that politics was not an issue.

"We are not opining on whether the world’s climate is changing, at what pace it might be changing, or due to what causes. Nothing that the commission does today should be construed as weighing in on those topics," she said in the announcing the decision.

To comply with the requirements, businesses will have to determine the potential impacts not only of regulations and possible litigation but also the effect climate-related potentialities like weather events and water shortages might have on their activities.

Legislation, regulations, international agreements and the physical impacts of a changing climate all may have effects on businesses and those who invest in them, the SEC announcement says. It also mentions opportunities that may arise from factors like increased demand for lower emissions products.

Other regulations — including regional and state-administered cap and trade programs — would certainly affect the return on investments in certain companies because they place a price on carbon emissions.

Ceres spokesman Peyton Fleming cited an example of what "good" disclosure might look like. The power company AES Corporation prepared information regarding regulatory risks under the Regional Greenhouse Gas Initiative — a regional cap and trade program covering ten northeastern U.S. states — in filing its Form 10-K with the SEC in 2008. In that, the company discusses uncertainties regarding the future, but it also forecasts increased costs based on possible future regulatory environments.

"For forecasting purposes, the company has modeled the impact of CO2 compliance for 2009-2011 for its businesses that are subject to RGGI and that may not be able to pass through compliance costs," the filing reads. "[T]he Company estimates that the RGGI compliance costs could be approximately $29.1 million per year from 2009 through 2011, which is the last year of the first RGGI compliance period."


See also:

SEC Should Require Disclosure of Risk to Fossil Fuel Investors

Report Warns Tar Sands a Risky Bet for Investors

Investors Applaud Shell’s Newfound Caution about the Tar Sands

Investor Survey Finds Asset Managers Fail to Weigh Climate Change Risks

Lawyers Advising Clients to Prepare for Economy-Wide GHG Regulation