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Carbon Transparency

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

Fortnightly Magazine - May 2008

more information about climate-change risks from companies directly. According to the Ceres petition, almost 50 shareholder resolutions on climate-change disclosure and emissions policies were filed before September 2007, constituting more than 10 percent of all resolutions filed. This too has encouraged many companies, such as Xcel and Exelon Generating voluntarily to disclose climate-change risks and GHG-emissions levels in their annual and quarterly SEC filings.

Disclosure Considerations

In light of competing pressures for increased disclosure of climate-change risk, public companies may benefit from guidance and an established structure within which they can evaluate, analyze and disclose the impacts of climate change and the risks it poses to their businesses. If the SEC were to act on the Ceres petition’s recommendations, it would provide the familiar framework of the SEC’s existing rules for assessing and disclosing the environmental, regulatory and climate-change risks facing affected companies.

In the past, the SEC has used its interpretive authority to require greater disclosure under the existing rules for specific events and new risks, such as requiring Y2K and Euro Conversion risk disclosure in the late 1990s. By leveraging off the framework of existing disclosure rules and providing guidance on material disclosure items, the SEC might make it easier for companies to address and respond to heightened climate-change disclosure demands.

As an added benefit, companies also may derive some positive public-relations benefits from expanded disclosure. Transparency with regard to climate-change risk and GHG emissions may engender better relations with the investment community, as well as with social and environmental groups.

Despite the guidance that an SEC interpretive release would provide to companies grappling with climate-change risk disclosure, effective disclosure nonetheless may prove to be difficult in practice. Evaluating potential regulatory risk and related compliance costs is particularly difficult, given that many GHG regulations still are evolving and no federal regulations exist. As differing schemes develop, companies may be subject to overlapping and inconsistent regulatory requirements. Disclosure of regulatory risk might become increasingly onerous if a company must consider all jurisdictions in which it may be subject to regulation.

In addition, while the physical or regulatory risk of climate change may be somewhat identifiable, assessing the effects of such risk and quantifying potential harm inherently are speculative. The lack of a standardized methodology for evaluating climate-change risk poses a significant obstacle to meaningful disclosure. While there have been public efforts to establish a global standard for GHG accounting and reporting, such as the Greenhouse Gas Protocol (, no methodology has been universally, or even nationally, adopted. As a result, reducing climate-change risk to the economic impact it may have on a company’s business, which is ultimately the information that investors are interested in, is a challenging endeavor. Even a company seeking to disclose voluntarily must first decide how to translate its emissions levels, regulatory risk and climate-change risk into more concrete data reflecting the impact these may have on the company’s financial and competitive positions. Determining climate-change risk may require considerable commitments of time, money and other resources by reporting companies, particularly given the highly technical nature of