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Carbon Transparency

Public companies face rising pressure to disclose climate-change risks.

Fortnightly Magazine - May 2008

Scientists, governments, businesses and the public have begun to accept that global warming and other climate changes have ceased to be mere theoretical possibilities and may pose significant risks to the environment and the economy. Regulation of greenhouse-gas (GHG) emissions and other efforts to control these growing environmental concerns increasingly are impacting businesses, and investors are seeking more and better information on climate-change risks to make informed investment decisions. Facing the realities of proposed legislation, litigation and shareholder action demanding greater corporate transparency regarding GHG and the impact of global climate change, public companies are struggling to determine whether and how they should disclose the potential risks that climate change poses to their businesses, financial conditions and operating results.

Disclosure Landscape

While the SEC hasn’t yet issued any formal guidance on climate change and corporate disclosure, it’s coming under increased pressure to require greater climate-change risk disclosure by public companies. In September 2007, Ceres (a national network of investors, environmental organizations and other public interest groups working with companies and investors to address sustainability challenges such as climate change), along with Environmental Defense and a coalition of 20 institutional investors, managing roughly $1.5 trillion in assets, submitted a petition to the SEC requesting that the SEC specifically address climate-change risk disclosure by public companies (see http://www.sec.gov/rules/petitions/ 2007/petn4-547.pdf .) Because many investors now consider climate-change risk to be part of the total mix of information they assess in making investment decisions, the petition requests that the SEC issue an interpretive release to make clear that existing SEC rules regarding the disclosure of “material” information ( i.e., information that a reasonable investor would consider important in deciding whether to invest) relating to a company’s business should require climate-change disclosure. The petition also notes that existing accounting rules regarding material contingent liabilities may require climate-change risk disclosure.

Under existing SEC disclosure rules, a public company must report the material effects of regulatory compliance on its capital expenditures, earnings and competitive position as part of the discussion of the general development and the competitive position of its business. In addition, the company must disclose all material pending legal proceedings and must specifically disclose certain environmental litigation matters. Finally, the company must report all known trends, events or uncertainties reasonably likely to have a material effect on its financial condition and operating results. Among other things, the petitioners suggest that, under these rules, a public company should be required to disclose:

• GHG emissions levels;
• Physical risks of climate change, such as the effect of changes in weather on its business, facilities and workforce; and
• Financial evaluation of potential regulatory risk ( i.e., the effect of compliance with climate regulation on capital expenditures, earnings and competitive positions); and
• Any potential environmental litigation.

In addition, the petition requests

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