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Public companies face rising pressure to disclose climate-change risks.
GHG regulations and the effects of climate change.
Implementing increased climate-change risk disclosure requirements within the existing SEC disclosure framework could provide what would become a well-traveled path for public companies to follow as they, the SEC and the investing public deal with the impact of climate change. However, to ensure effective and adequate compliance, any heightened disclosure obligations should be supplemented with specific guidance regarding the kind of information to be disclosed and the type of evaluations to be conducted by reporting companies. For example, when the SEC issued its interpretive release requiring increased Y2K risk disclosure, it enumerated several potential issues for reporting companies to consider and disclose, such as the company’s general plans for addressing Y2K issues relating to its operating systems and the total dollar amount the company estimates would be spent to remediate any Y2K issues. Without particular guidance from the SEC, increased climate-change risk disclosure might prove to be a burdensome task for public companies.
Even in the absence of formal guidance, companies in targeted industries will face the need to consider whether to make voluntary disclosures. These include companies with high GHG-emission levels, such as utilities and power generators; companies with operations in countries that have ratified the Kyoto Protocol or in U.S. regions with formal GHG regulations; and those that might be directly affected by climate change. Utilities and power generators, to the extent they emit GHG, may want to consider disclosing their past, current and predicted emissions levels, as well as the potential effects of compliance with any GHG regulations that they are, or will be, subject to.
If the SEC in fact issues the suggested interpretive release, or if the SEC, state or other governmental authorities implement further disclosure requirements, the potential consequences of a company’s failure to disclose climate-change risk could include the initiation of an SEC investigation or civil action, the creation of private rights of action, or state and local enforcement. And regardless of whether any of the climate-change disclosure rules become mandatory, failure to make adequate climate-change risk disclosure could lead to investor dissatisfaction and defection.
Should a company decide to disclose voluntarily, or should the SEC issue the proposed interpretive release in the near future, a disclosing company can use existing corporate structures to assess and disclose climate-change risks. For example, a company could supplement an existing disclosure committee with one or more environmental specialists or consultants. The committee could then evaluate environmental and climate-change information from the different business units of the company, determine what information would be material, and require disclosure in the same manner that it evaluates and discloses other material information about the company.
A company’s initial steps toward adequate climate-change disclosure include forming a management team and board committee to focus on the issue; measure companywide GHG emissions; and benchmark its performance and practices against its industry peers (see sidebar, “Climate Change Disclosure Toolkit”) .
The company also could determine the physical, regulatory and financial risk to fixed assets, products and competitive positioning that climate change generates. Physical risk might