SEC Guides Public Companies on Climate Change Risk Disclosure

The guidance was approved in a formal vote at Wednesday's SEC Commissioners meeting in Washington. Some investors say the lack of specific guidance to date has resulted in weak and inconsistent climate-related disclosure by public companies.

"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," said SEC Chairman Mary Schapiro. "Today's guidance will help to ensure that our disclosure rules are consistently applied."

SEC Chairman Mary Schapiro explains the new climate change guidance. (Photo courtesy SEC)

An interpretive release, as this is known, said Schapiro, does not create new legal requirements or modify existing ones. It is merely intended to provide clarity and enhance consistency.

The SEC guidance states what information publicly-traded companies need to disclose to investors in terms of climate-related "material" effects on business operations. The relevant rules cover a company's risk factors, business description, legal proceedings, and management discussion and analysis.

When assessing potential disclosure obligations, the SEC says companies should consider the physical impacts of climate change, the impact of international accords as well as national legislation and regulation, and also the indirect consequences of regulation and business trends.

"The business risks of climate change cannot be ignored. With this guidance investors can make more sound decisions based on better information - and businesses will have a level playing field with clear standards and expectations for disclosure," said Mindy Lubber, president of Ceres and director of the Investor Network on Climate Risk, a network of 80 institutional investors with $8 trillion in collective assets.

More than a dozen investors managing over $1 trillion in assets, plus Ceres and the nonprofit Environmental Defense Fund, requested formal guidance in a petition filed with the Commission in 2007, and supported by supplemental petitions filed in 2008 and 2009.

"Companies across America are poised to prosper and create new jobs in the clean energy economy," said Environmental Defense Fund President Fred Krupp. "Investors have a right to know which companies are planning to be part of the clean energy future and which are lagging behind."

At the SEC Commissioners meeting, Schapiro explained that the SEC is not considering amending the reporting obligations of public companies nor redefining long-standing interpretations of materiality.

"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 said. "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," said Schapiro, "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."

"We're glad the SEC is stepping up to the plate to protect investors," said Anne Stausboll, chief executive officer of the California Public Employees Retirement System, the nation's largest public pension fund with more than $205 billion in assets under management.

"Ensuring that investors are getting timely, material information on climate-related impacts, including regulatory and physical impacts, is absolutely essential," Stausboll said. "Investors have a fundamental right to know which companies are well positioned for the future and which are not."

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