The U.S. Securities and Exchange Commission yesterday said companies must disclose to investors the physical impact that climate change has on assets and the consequences of regulations curbing greenhouse gas emissions.
The SEC public disclosure guidance on climate-related risks is seen as a major victory by an army of environmental groups and institutional investors that have pressed the issue since 2007.
"This is a big step forward," said Maryland State Treasurer Nancy Kopp, who also chairs the board of trustees for the state's $33 billion pension fund. "As investors, the information being disclosed isn't as useful as it ought to be."
The SEC under President Obama and SEC Chairwoman Mary Schapiro has worked quietly on the climate-risk guidance in recent months. But, issued on the same day as Obama's State of the Union address, it drew fire from Republicans on Capitol Hill and at the commission. Critics used imprisoned fund manager Bernard Madoff, the global financial crisis and the contentious politics of climate science as cudgels against the SEC.
"Having permitted the now-imprisoned Bernard Madoff to bilk as much as $50 billion from trusting investors, it will now turn its investigative eye to global warming instead of investor protection," Reps. Joe Barton (R-Texas) and Greg Walden (R-Ore.) said in a letter sent to Schapiro this week. Barton is the top Republican on the House Energy and Commerce Committee.
Barton and Walden hammered the proposal for being "transparently political and such a breathtaking waste of the commission's resources."
'Guidance' considered binding
The commission approved the disclosure guidance on a 3-2 vote. The guidance doesn't carry the same force of law as a formal regulation, but public companies consider it binding. The issue revolves around the term "material risk," which is a regulatory guidepost used by companies to determine what information to disclose to investors. It builds on existing requirements that companies disclose environmental risks, including U.S. EPA rules.
Under the guidance, companies should consider whether existing laws or pending legislation and regulations are a risk, and whether climate accords carry some financial risk. It also directs companies to consider whether actual and potential physical impacts should be disclosed, including whether there is a risk of increasing insurance claims in coastal areas due to severe weather or sea level changes.
Business trends matter, too. "Legal, technological, political and scientific developments regarding climate change may create new opportunities or risks for companies," says the SEC's guidance. The SEC noted that companies shouldn't ignore how climate change affects their competitive positions. A company in time, for example, might see less demand for energy-intensive goods that result in heavy industrial emissions or, on the flip side, rising demand for "green" goods and services that produce less emissions.
Proponents of the regulatory guidance, which by some measures include state retirement funds and other institutional funds worth more than $1 trillion, have banged away at the issue since Obama took office. The George W. Bush administration largely ignored requests that the SEC direct companies to disclose more information about the liability they face from emissions, regulations, rising commodity prices, property damage and the long-term costs associated with replacing equipment.
Pension fund is jubilant
"Ensuring investors are getting timely, material information on climate-related impacts, including regulatory and physical impacts, is absolutely necessary," said Anne Stausboll, CEO of the $200 billion California Public Employees' Retirement System, in a statement.
In a joint release, groups under the umbrella of Boston-based Ceres and its Investor Network on Climate Risk, alongside the Environmental Defense Fund, hailed the commission's action. They noted that it is the world's first economywide climate risk disclosure requirement. The groups requested a formal guidance in a petition filed at the SEC in 2007, with supporting materials in 2008 and 2009.
The ball also got rolling in March last year, when the National Association of Insurance Commissioners adopted rules requiring insurance companies to disclose the impact of climate change on their business decisions. Insurers will have to publicly disclose climate risks to regulators and shareholders starting in May 2010.
Schapiro and other proponents said the guidance "is merely intended to provide clarity and enhance consistency."
"If something has a material impact on a company, then it is something that needs to be disclosed -- that has always been the case," Schapiro said. "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," she asserted.
If so, she added, companies should disclose the impact on liquidity, capital resources and operations. "Similarly, a company must disclose the significant risks that it faces, whether those risks are due to increased competition or severe weather," she said. "These principles of materiality form the bedrock of our disclosure framework."
Opponents come out swinging
Commissioner Kathleen Casey, appointed by President George W. Bush, opposed the measure. She suggested that the SEC was trying to please the "social environmental policy lobby," which she said has long pressed the commission on the disclosure issue to drive environmental policy objectives. "The issuance of this release at a time when the state of science, law and policy relating to climate change appear to be increasingly in flux makes little sense," she said.
"As we begin to emerge from the worst financial crisis in generations, our consideration of this release today sends a curious signal to the investment community about what we view as the most pressing issues facing the commission," she told her colleagues at an open meeting.
"In truth, our disclosure regime related to environmental issues, including climate change, is highly developed and robust," she asserted. "In fact, notably, the release does not attempt to make the case that disclosures relating to climate change have been consistently deficient."
Barton and Walden characterized the SEC's guidance differently than the commission did, suggesting the guidance requires corporations "to explain how they are alleviating global warming."
The congressmen also accused the SEC of "skirting the time-consuming business of collecting, reading and considering comments from the public." Barton, in particular, fought cap-and-trade legislation passed by the House in June. He has questioned climate science, and has said the costs industry would bear to comply with a federal law mandating cuts in greenhouse gas emissions would be too high.
Maryland's Kopp said this isn't about science or politics.
More public companies are disclosing their climate change-related risks, she said, but the reporting isn't consistent enough to compare companies against each other.
"Neither I nor the commissioners are in a position to enter into a scientific debate on climate change," Kopp said. "All I know as an investor is that it is impacting my ability to make investment decisions, and we need information on material impacts and material opportunities in the companies we invest."