| eerencWhat does the Securities and Exchange | | | | "credits" (businesses emitting below their quota) |
| Commission (SEC) have to do with sustainability? | | | | may be able to sell them as investment |
| On January 27th, 2010 the SEC published guidance | | | | instruments to improve their own capital position. |
| for public companies on the reporting of impacts | | | | Let's not forget the potential physical effects of |
| potentially contributing towards climate change. | | | | climate change. Sea level rise, melting of |
| Additionally, they disclose the effects climate | | | | permafrost, availability of clean water, greater |
| change may and can have on a company's | | | | temperature extremes, and increase in storm |
| profitability. While some public and corporate | | | | intensity can all have deleterious effects on a |
| officials are stating that the risks cannot as yet | | | | company's operation and even demand for their |
| be properly assessed and the requirements are | | | | products. For example, warmer winters may |
| premature, most major investors, which have | | | | reduce seasonal demand for heating supplies, while |
| been supporting the new guidelines, are pleased. | | | | a burst of extreme cold can overwhelm |
| Why has the SEC taken this action and is this | | | | distribution infrastructures; banks holding significant |
| information really pertinent to an investor? | | | | debt in coastal properties could be at higher risk; |
| Let's take a look at what has been occurring over | | | | drought or flooding could negatively impact |
| the past decade. Many states and local | | | | agricultural firms. |
| governments have enacted their own legislation | | | | According to the SEC, the new disclosure |
| resulting in greater regulation of greenhouse gas | | | | guidance is simply an extension of regulations |
| emissions (GHG). GHG legislation on climate change | | | | pertaining to environmental issues implemented in |
| is currently pending in Congress after the House | | | | the early 1970's. Focused primarily on disclosure |
| of Representatives approved a bill, later amended | | | | guidelines, the original rules sought to monitor |
| in 2009 by the Senate, to limit a company's | | | | compliance regarding material discharge and |
| emissions of greenhouse gases through a system | | | | environmental protection, for use in potential |
| of "Cap and Trade". Even the EPA has begun to | | | | litigation. The current standards have evolved to |
| require large emitters to disclose and report their | | | | "provide that information is material if there is a |
| data. | | | | substantial likelihood that a reasonable investor |
| Since the 1990's, 186 countries have supported | | | | would consider it important in deciding how to |
| the efforts of the Kyoto Protocol, and the | | | | vote or make an investment decision, or, put |
| European Union Emissions Trading System (EU | | | | another way, if the information would alter the |
| ETS) which is the mechanism that controls the | | | | total mix of available information." ( Search "SEC |
| Cap and Trade system of allowances and credits | | | | Release #33-9106" ) |
| for carbon and other greenhouse gases. While the | | | | To the CFO, properly assessing risk can be a |
| U.S. has never ratified this treaty, U.S. companies | | | | complex issue, especially when considering the |
| doing business in those countries are required to | | | | effect climate change may have on future |
| comply. | | | | company operations. Granted, there is a delicate |
| Climate change risk has not gone unnoticed by | | | | balance in disclosure between compliance and |
| the insurance industry. In their 2008 report, major | | | | stock valuation and demand. Currently, companies |
| investment firm Ernst & Young stated that | | | | who are making some efforts on disclosing |
| climate change was the top strategic risk. They | | | | climate change risks are simply "burying" them in |
| explain it as being, "long-term, far-reaching, and | | | | their 10-K form. It appears this practice is no |
| with significant impact on the industry" (Climate | | | | longer acceptable with the new guidance |
| Change Greatest Strategic Risk to Insurance | | | | requirements. |
| Industry). It remained on the top 10 for 2009 | | | | Are there any actions a company facing climate |
| (Top 10 Risks Most Likely to Affect the Insurance | | | | change risks may employ to comply with the full |
| Sector During 2009). Partially as a result of these | | | | disclosure requirements and still show the |
| reports, the National Association of Insurance | | | | company in a positive light? One method |
| Commissioners (NAIC) created an industry | | | | suggested is certification, primarily through an |
| standard of mandatory disclosure. Designed for | | | | internationally recognized program and certification |
| state regulators, it highlights potential financial risks | | | | body. The International Standards Organization |
| due to climate change as well as actions taken to | | | | (ISO) has developed their ISO 14001:2004 |
| mitigate them. New actuarial models are in | | | | Environmental Management System to assist |
| development along with new products specifically | | | | companies in developing or transitioning to more |
| designed to cover these new risks. | | | | sustainable systems and practices. Their newly |
| So what are the risks to a public company? | | | | developed standards ISO 14064 and 14065 |
| Legislation and new regulations can certainly have | | | | provide an internationally accepted framework for |
| a significant effect on capital expenditures. Cap | | | | measuring GHG emissions and verifying claims. |
| and trade allowances could also force a high | | | | In our next article, we will examine the details and |
| emitter to buy credits, creating a negative effect | | | | requirements of the new SEC guidance, discuss |
| on cash flow. Even companies not subject to new | | | | the potential benefits of a certification program, |
| regulations could be affected if their own supplies | | | | and also measure the relevance this action has on |
| and services are suddenly only available at a | | | | non-public companies. |
| higher cost. As with any challenge, there will be | | | | References: |
| companies well-positioned to benefit from current | | | | Climate Change Greatest Strategic Risk... |
| and proposed legislation. For example, those with | | | | Top 10 Risks Most Likely... |