29 January 2010

Yes, Climate Change does matter, says the SEC

On January 27th, the SEC commissioners voted to approve an interpretive release requiring companies to discuss the potential impact of Climate Change related legislation on their business. This is a very important announcement by the SEC, but falls short of anything that should cause any concern to any reporting company. This release by itself certainly should not create or cause additional work. From the SEC's point of view (and I certainly agree) companies should already be providing this information.

In her opening remarks, Chairman Schapiro said:

...the Commission is not making any kind of statement regarding the facts as they relate to the topic of “climate change” or “global warming.” And, we are not opining on whether the world’s climate is changing; at what pace it might be changing; or due to what causes. Nothing that the Commission does today should be construed as weighing in on those topics.The Commission is also not considering amending well-defined rules concerning public company reporting obligations, nor redefining long-standing interpretations of materiality. These rules and interpretations have served investors well for decades, and provide both the framework and flexibility necessary to apply to changing facts and circumstances. If something has a material impact on a company then it is something that needs to be disclosed — that has always been the case.

What is most important here is that she has said that the SEC is not taking a position on climate change, that is for the scientists and politicians. The SEC is simply reminding companies of their responsibility to provide full disclosure of risks to investors. She went on to say:

It is neither surprising nor especially remarkable for us to conclude that of course a company must consider whether potential legislation — whether that legislation concerns climate change or new licensing requirements — is likely to occur. If so, then under our traditional framework the company must then evaluate the impact it would have on the company’s liquidity, capital resources, or results of operations, and disclose to shareholders when that potential impact will be material. Similarly, a company must disclose the significant risks that it faces, whether those risks are due to increased competition or severe weather. These principles of materiality form the bedrock of our disclosure framework.

Again, reinforcing that this is the type of reporting and disclosure that companies should already be making. While I would have liked to see something much stronger, such as mandating reporting along the lines of the CDP (Carbon Disclosure Project), or even a variation on the GRI (Global Reporting Initiative) G3 standard, this is a good first step to providing investors with information that is important and relevant, with a Climate Change perspective in mind.

It remains my view that Reg S-K already provides the basis for requiring significant additional reporting on Climate Change risk, and in fact on the range of Sustainability issues. The requirement already exists to discuss all "known trends" and "uncertainties" that could impact liquidity or operations. Climate Change and Sustainability issues, regardless of one politics or belief system, are accepted by enough scientists, politicians, governments, companies and individuals to rise to the level of being a "known trend". If however an individual simply says "No, I do not accept that...", then those issues rise, due to the otherwise wide acceptance, to the level of an "uncertainty" and therefore must be discussed.

In his statements, Commissioner Louis Aguilar said:

Over two years ago, the Intergovernmental Panel on Climate Change concluded that it is "unequivocal" that the Earth's climate is warming. In October of last year, 13 federal agencies and departments published a coordinated annual report to Congress that reached the same conclusion. It is expected that climate change, if unchecked, will result in severe harm to ecosystems and people around the world.

Finally, Commissioner Aguilar also said:

As the Supreme Court has explained, doubts about materiality will be "commonplace," but these doubts should be resolved in favor of investors. Similarly, previous Commission MD&A guidance clearly requires disclosure of known trends, events, or uncertainties where materiality is uncertain.

It is great to see the SEC take the first step, now hopefully this will allow and encourage them to take the next.

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