In February, David Vidal, research director of Global Corporate Citizenship at The Conference Board, [Click here
to read the report, membership required.]wrote in a research report Ready or Not: Companies and the Sustainability Tipping Point
that “98 of the top 100 non-financial corporations in the world now make public at least some information related to environmental issues and 87 provide explicit information about greenhouse gases emissions.” Citing a report by the United Nations Conference on Trade and Development, Vidal also wrote that two-thirds of those companies have assigned responsibility for environmental performance at the board level.
The interpretative guidance for climate change disclosure [For details, read my March 8 blog post
.] was groundbreaking because it sets in motion a process that should lead to meaningful disclosure standards in the long term, according to Michael Moran, a vice president of Goldman Sachs and member of that investment bank’s Global Markets Institute.
“When we look at accounting standards, the process [for creating them] is iterative and evolutionary,” Moran said during Tuesday’s Conference Board Webcast on Understanding the SEC Climate Change Guidance. [To view replay, click here
.] “I would expect to see similar process for setting disclosure standards for climate change.”
He pointed out three particular reasons the SEC guidance is groundbreaking:
1.) “It raised the bar for what investors can expect for climate change disclosures.”
2.) “It provided a signal that climate change would be important for 2010. This showed that sustainability wouldn’t go away after the Copenhagen Summit.”
3.) “It provided an example that investors can help drive disclosure standards.”
James Budge, a special counsel in disclosure operations of the SEC’s Division of Corporate Finance, believes the interpretative guidance timing is more of a result of companies starting to see the impact of climate change as a material event. While he didn’t call for mandatory sustainability reporting, he told the Webcast viewers that worldwide events are making it so companies and boards need to know more about climate change.
“The overarching message of this release
is to get a thought process going so the impact of climate change can be brought to the boards and investors attention,” Budge said. As for the timeframe regarding climate change disclosure, Budge said the SEC is reasonable.
“Clearly, if something [like a change in weather patterns or more volatile hurricanes] is 50 years down the road, it is not going to be expected in the current disclosure,” he said. “You don’t expect people to break out a crystal ball.”
So what should boards and their companies expect to include in their MD&A in their proxies, Form 8-Ks and any other disclosures required by the SEC as it pertains to climate change?
The interpretative guidance uses the following examples of issues companies should consider when determining materiality:
- Current and potential legislation and regulation (“You should make an analysis of how such laws could have an impact on your company,” Budge said.)
- International accords (Kyoto Protocol)
- Indirect consequences of regulation or business trends (such as the elimination of using a certain product due to its high carbon footprint, such as incandescent light bulbs, could have on a company’s bottom line)
- Physical impact of climate change (“How weather patterns could affect your business, such as insurance claims related to more hurricanes,” Budge said.)
Other panelists on the Webcast had some advice about what directors should do regarding their knowledge of climate change.
“At the very least, directors need to be informed and understand the science,” said Adam Kanzer, managing director and counsel for Domini Social Investments. “They need to be in a position to second guess management. They need to know [politics aside] this is a physical process that is happening.”
Doug Cogan, director of climate risk management at RiskMetrics Group, believes boards need to realize climate change is an important risk management issue and treat it as such. “They should make sure that emerging issues are matters that boards have the fiduciary duties to discuss,” Cogan said.
When SEC Chair Mary Schapiro and the rest of the commission issued interpretative guidance on climate change disclosure back in February, they said they were merely just “providing clarity and enhancing consistency” for rules that have existed for decades. Intended or not, the consequence of the guidance has put public companies one step closer to mandatory sustainability reporting.
If you are a director on a public company and have been skeptical about the need for sustainability reporting, specifically climate change disclosure, you may want to take a look at the latest data on who is voluntarily reporting.