Yesterday, the Securities and Exchange Commission voted (narrowly) to issue guidance to regulated companies about their exposure to climate change regulation.
Appropriately, for a non-science agency, the Commission did not weigh in on the debate about climate change. Their decision, though, acknowledges that the climate change issue is altering domestic and international laws and regulations, and that investors should know how those changes will affect their investments.
Companies are supposed to report how their interaction with the environment impacts their financial health, through the lenses of regulatory compliance and enforcement actions (read: cleanups or litigation). As the Code says, “Appropriate disclosure also shall be made as to the material effects that compliance with Federal, State and local provisions which have been enacted or adopted regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, may have upon the capital expenditures, earnings and competitive position…”
This new guidance does two things to clarify this requirement as it regards climate change. These are topics that we have been counseling people for over a year:
1) It acknowledges that “provisions” (laws and regs) based on climate change are being made in operational and trade legislation, and these provisions will impact business operations and profitability in the same way that RCRA requires companies to handle their hazardous waste properly.
2) It brings to regulatory reality the fact that any future carbon legislation (tax or cap/trade) will impact business operations (some businesses more than others, if they use more carbon-based energy). This would be similar to government fees on landfilling waste.
In one place, though, the guidance may be well-intentioned, but unenforceable. The SEC is asking companies to forecast – and report – how the physical impacts of climate change (rising and warming seas, different weather patterns, etc.) will affect the company materially. We encourage our clients to evaluate their businesses with this in mind because we see exposure to climate risk as one component of a sustainability strategy, but I don’t see why the SEC should require them to do so.
I see this as an admirable goal – one that a true forward-thinking company is already considering – but one that sounds like legislating good management.
Your thoughts?
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