TRIRIGA Insights

January 23, 2010, the U.S. Securities and Exchange Commission (SEC) agreed for the first time that corporations are required to disclose climate change risks to investors. According to a joint press release from CERES and EDF, the SEC’s guidance is “the first economy-wide climate risk disclosure requirement in the world”.

The SEC’s decision was influenced by repeated requests over the past three years by investor groups who urged the SEC to require full corporate disclosure of climate-related business risks and strategies for addressing those risks. The announcement highlights a number of areas where disclosure of climate change risks would be required. These include: direct impact from legislation and regulation, indirect consequences of regulation or business trends, and the physical impact of climate change.

Direct impact from legislation and regulation
Increasingly organizations will face material impacts from climate change legislation and regulation. This is especially true for organizations that directly emit large amounts of carbon emissions. Many of these organizations are already experiencing the risks and challenges of complying with the EPA’s Mandatory Greenhouse Gas (GHG) Reporting rule and potential regulation. Under the SEC’s guidance, the potential material impact of this regulation should be addressed in financial reports to investors. As proposed legislation sits in the U.S. Senate, a price on carbon becomes more probable, organizations will certainly need to disclose the potential financial impact of direct carbon emissions.

Indirect consequences of regulation or business trends
Large direct emitters of carbon emissions will not be the only organizations affected by the SEC’s guidance. Many organizations with modest direct GHG emissions will still be affected by regulations and business trends related to carbon management. As discussed previously, regulation that puts a price on carbon will have the indirect affect of increasing energy costs for all organizations. And, increasingly, organizations that have direct or indirect carbon emissions in excess of the industry average will face a material risk of increased costs and decreased customer demand.

Physical impact of climate change
Certain industries such as insurance and finance will be directly affected by the climatic changes predicted by many scientists. Increased natural disasters such as storms and droughts will result in increased insurance payments and investment write-offs. As the evidence for climate change grows, organizations located in areas most affected will be required to disclose the risks of business disruption due to climatic changes and the risk of increased insurance premiums and capital costs.

With the SEC’s announcement, organizations that fail to disclose material risks from climate change face the real threat of lawsuits from investor groups or punitive action from the SEC. Mindy Luber, president of CERES and directory of the Investor Network on Climate Risk called the SEC’s announcement, “a clarion call about the vast risks and opportunities climate change poses for US companies and the urgency for integrating them into investment decision making”.

There is little doubt that the trend towards increased scrutiny of climate change risks by investors, regulators, and customers will continue. The longer an organization ignores the risks from climate change, the greater the negative effect on company valuation and profitability. As TRIRIGA CEO, George Ahn, stated in an article in the Environmental Leader last August, “All else being equal, companies that adequately disclose and address risks from climate change will be rewarded with higher valuations and a lower cost of capital.”

The first step toward accurately addressing risks from climate change is to baseline your organization’s energy use and environmental impact. To gain a sense of where and how to start reporting, consider real estate. Buildings represent 48 percent of energy consumption and present the most significant opportunities to reduce environmental impact, improve operating costs, and demonstrate carbon reduction accountability.