SEC Wants to Know: Is Your Carbon Footprint a "Material Risk" to International Climate Change Agreements?
Climate Change is a red hot area right now and is a top priority of discussion this week at the World Economic Forum in Davos, Switzerland.
It seems that everyone is throwing their hat into the ring in one way or another. Now the Securities and Exchange Commission has, rather surprisingly, entered the climate change picture.
In an unprecedented move, the SEC issued a directive that companies should warn investors of global-warming risks.The SEC directive is the first economy-wide climate risk disclosure advisory in the world.
This change of face marks a complete turnaround for the commission, whose former Chairman Christopher Cox refused to address investor concerns regarding climate risk disclosure. Under the stewardship of SEC’s current chairwoman, Mary Schapiro, the commission has made climate change a high priority. For international business this is a big deal.
The SEC issued a press released entitled “SEC Issues Interpretive Guidance on Disclosure Related to Business or Legal Developments Regarding Climate Change” that lays out some of these potential impacts and what it means for disclosure. Among the areas highlighted by the SEC release:
Impact of Legislation and Regulation: When assessing potential disclosure obligations, a company should consider whether the impact of certain existing laws and regulations regarding climate change is material. In certain circumstances, a company should also evaluate the potential impact of pending legislation and regulation related to this topic.
Impact of International Accords: A company should consider, and disclose when material, the risks or effects on its business of international accords and treaties relating to climate change.
Indirect Consequences of Regulation or Business Trends: Legal, technological, political and scientific developments regarding climate change may create new opportunities or risks for companies. For instance, a company may face decreased demand for goods that produce significant greenhouse gas emissions or increased demand for goods that result in lower emissions than competing products. As such, a company should consider, for disclosure purposes, the actual or potential indirect consequences it may face due to climate change related regulatory or business trends.Physical Impacts of Climate Change: Companies should also evaluate for disclosure purposes the actual and potential material impacts of environmental matters on their business.
The SEC’s involvement in climate change regulation drives the federal government deeper into the climate debate, potentially reshaping management decisions at companies across the country and the world.
What do I think? I think it’s about time that international environmental issues are put on the national agenda. This is also good for investors. This paves the way for the development of a consistent standard for companies to report climate risk that will help all investors make better-informed decisions.
Trend to Watch: Look for Securities Regulators in Other Nations to Issue their Own Climate Change Directives in the Very Near Future