SEC and Climate Change Risks disclosure

Posted on November 25, 2010 by

The United States Securities Exchange Commission (“SEC’) [1]has recently taken several actions which clarify its strategy on environmental disclosures by reporting companies. SEC along with Financial Accounting Standards Board (“FASB”) and others have issued guidance regarding climate change disclosures.

These guidances include

  1. Standards regarding company exclusion of shareholders’ environmental proposals
  2. Enforcement actions relating to the manipulation of company environmental reserves.

Under proposed regulations, companies are required to disclose material estimated capital expenditures for environmental controls. Companies are required to disclose various items including

  1. Costs and profits from carbon credits or allowances. Such carbon allowances and credits will become mandatory when cap-and-trade system across USA becomes functional.
  2. Facility or technology costs for complying with certain environmental laws.
  3. Any possible changes in profits and losses resulting directly or indirectly from any new environmental laws.

Consequences of Regulation on Business Trends

These guidelines from SEC are likely to increase the overall climate change and carbon related disclosure requirements from companies. The companies will need to focus on the following disclosures:

  • Decreased demand for goods that produce significant GHG emissions
  • Increased demand for goods that result in lower GHG emissions than competing products
  • Increased competition to develop innovative new products
  • Increased demand for generation and transmission of energy from alternative energy sources; and
  • Decreased demand for services related to carbon based energy sources, such as drilling services or equipment maintenance services.

Given the elaborate demands and pressures from stakeholders, companies will have to be judicious in balancing the compliance and its reputation.

Climate Change- An overview

Climate change is a long-term change in the statistical distribution of weather patterns over periods of time that range from decades to millions of years. It may be a change in the average weather conditions or a change in the distribution of weather events with respect to an average, for example, greater or fewer extreme weather events.

Such changes are likely to have the following physical consequence on business;

  • Cause property damage to companies with coastal operations;
  • Disrupt operations or cash flow if major customers and suppliers are directly affected;
  • Increase insurance claims and liabilities for companies in the insurance industry;
  • Decrease agricultural production in previously highly productive areas and
  • Increase insurance premiums and deductibles for companies who are likely to be directly impacted by these factors.

The SEC plans to monitor the impact of this release on filings made in the coming months as part of its ongoing review process.

[1] The U.S. Securities and Exchange Commission (frequently abbreviated SEC) is a federal agency which holds primary responsibility for enforcing the federal securities laws and regulating the securities industry, the nation’s stock and options exchanges, and other electronic securities markets in the United States.

Posted in: Sustainability