Learning Climate Change Risk Avoidance from SEC Guidance

Climate change related disclosures and strategies

Impact of legislation and regulation.

Companies should consider specific risks they face as a result of climate change legislation or regulation and avoid generic risk factor disclosure that could apply to any company.

Management can assess whether any enacted climate change legislation or regulation is reasonably likely to have a material effect on the company’s financial condition or results of operation.

Unless management determines that it is not reasonably likely to be enacted, managers must proceed on the assumption that the legislation or regulation will be enacted. Second, management must determine whether the legislation or regulation, if enacted, is reasonably likely to have a material effect on the organization, its financial condition or results of operations.

Opportunities:

For example, if a “cap and trade” type system is put in place, companies or organizations may be able to profit from the sale of allowances if their emissions levels end up being below their emissions allotment. Likewise, those who are not covered by statutory emissions caps may be able to profit by selling offset credits they may qualify for under new legislation.

Examples of possible consequences of pending legislation and regulation related to climate change include:

• Costs to purchase, or profits from sales of, allowances or credits under a “cap and trade” system;
• Costs required to improve facilities and equipment to reduce emissions in order to comply with regulatory limits or to mitigate the financial consequences of a “cap and trade” regime; and
• Changes to profit or loss arising from increased or decreased demand for goods and services produced by the company arising directly from legislation or regulation, and indirectly from changes in costs of goods sold.

International accords.

We already have noted the Kyoto Protocol, the European Union ETS and other international activities in connection with climate change remediation. The potential sources of disclosure and opportunity related to international accords are the same as those discussed above for U.S. climate change regulation.

Businessess whose businesses are reasonably likely to be affected by such agreements should monitor the progress of any potential agreements and consider the possible impact in satisfying their disclosure obligations.

Indirect consequences of regulation or business trends.

• Decreased demand for goods that produce significant greenhouse gas emissions;
• Increased demand for goods that result in lower 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.

Another example of a potential indirect risk from climate change that would need to be considered for risk factor disclosure is the impact on an organization’s reputation. Depending on the nature of an organization’s business and its sensitivity to public opinion, a management team may have to consider whether the public’s perception of any publicly available data relating to its greenhouse gas emissions could expose it to potential adverse consequences to its business operations or financial condition resulting from reputational damage.

Physical impacts of climate change.

As noted in the GAO report, severe weather can have a devastating effect on the financial condition of affected businesses.

Possible consequences of severe weather could include:

• For companies with operations concentrated on coastlines, property damage and disruptions to operations, including manufacturing operations or the transport of manufactured products;
• Indirect financial and operational impacts from disruptions to the operations of major customers or suppliers from severe weather, such as hurricanes or floods;
• Increased insurance claims and liabilities for insurance and reinsurance companies;
• Decreased agricultural production capacity in areas affected by drought or other weather-related changes; and
• Increased insurance premiums and deductibles, or a decrease in the availability of coverage, for plants or operations in areas subject to severe weather.

Conclusion

We have found these guidelines to be pertinent and valuable for companies, organizations and municipalities of ALL SIZES as we strategize for effective, sustainable functioning during increasingly volatile times brought about by climate change.