Disclosure of climate change risks finally came to annual reports this year. So far, the picture is slightly cloudy.
The Securities and Exchange Commission approved its interpretive guidance for climate change disclosure on Feb. 8, when most year-end companies were already nearly finished with their Form 10-K filings for 2009—so dramatic changes in what companies are disclosing in this year’s reports have been rare.
Instead, companies are attempting new iterations of old disclosures made in previous years. And since nobody in previous years knew what good disclosure of climate change risk should look like, the result this year is disclosure that’s all over the map.
Kamlet
“So far this year, we are seeing some companies make an effort to include additional disclosure related to climate change in light of the SEC interpretive guidance,” says Bradley Kamlet, a lawyer with the law firm Nixon Peabody. “But it’s still early, and disclosures in this area will further develop over time.”
Historically, only a handful of companies—mostly in the energy, utility, or industrial sectors—have made any disclosure in their SEC reports at all pertaining to climate change or greenhouse gas emissions. In a review of 2009 annual reports at 400 companies done by the law firm McGuireWoods LLP, only 17 percent included a discussion of climate change risks.
Thanks to the SEC guidance from earlier this year, most observers say that is likely to change. Exactly how is still anyone’s guess.
Coburn
“The SEC guidance is one of a number of important factors” likely to shape disclosure in this area, along with Environmental Protection Agency rules, state regulation and shareholder resolutions, says Jim Coburn, a senior manager at the environmental group CERES.
Those other important factors include new EPA reporting rules for large emitters of greenhouse gasses; a rule from the National Association of Insurance Commissioners requiring insurance companies to disclose their financial risks due to climate change; and legislative proposals in Congress to “cap and trade” greenhouse gas emissions. Investors have also filed 95 shareholder resolutions related to climate change at 82 U.S. and Canadian companies as of mid-March, according to CERES.
Sellers
“The SEC guidance should put this more on companies’ radar screens,” particularly smaller companies, where disclosure has been sparse, says Jane Whitt Sellers, a partner at McGuireWoods and one of the authors of the climate-change disclosure study. “We’ve seen iteratively more disclosure in this area in each of the last two years, so we’d expect to see more disclosure this year than last, and the SEC’s action could prompt more disclosure, particularly among companies that file later in the year.”
DISCLOSURE PRACTICES
Disclosure Practices by Company Size
The chart below shows that larger companies are more likely to include climate change disclosures in their Form 10-K than smaller ones. The light-green columns indicate the number of companies McGuire Woods studied in the S&P 500, grouped by size; the dark-green columns next to them indicate the number of companies in that group that disclosed climate change risks.
Source:
McGuireWoods LLP Report on Climate Risk Disclosure (2009)
The SEC, through a spokesman, declined to comment on the disclosure it has seen so far. Observers who spoke with Compliance Week, however, have not yet seen any SEC staff comment letters specifically on climate change disclosure.
Observers say more clarity around the outcome of legislative and regulatory efforts related to climate change and feedback from the SEC via staff comment letters will also help improve companies’ disclosures going forward.
While changes in disclosure resulting from the guidance will be more evident next year, observers point to several recent 10-K filings where companies have refined disclosures related to climate change or added new disclosures, such as those by AES Corp., PG&E, Exelon, Duke Energy, and PepsiCo.
Where Disclosure Happens
Most of the additional disclosure appears in the Management Discussion & Analysis, Risk Factors, or Business sections of the Form 10-K, Kamlet says. “The disclosure really runs the spectrum.”
CERES’ FINDINGS
Below is an excerpt of the CERES report on climate change disclosure.
Summary of Findings
This report found limited climate risk disclosure in SEC filings in all the sectors we examined. Out of 100 companies covered in this report, 28 had no discussion of risk assessment, 52 described no actions to address climate change, and 59 made no mention of emissions or a climate change position. Many companies in the insurance and transportation sectors provided no disclosure whatsoever of any climate change-related information.
Only two companies in the report disclosed slightly more than half of the information requested by investors in the Global Framework for Climate Risk Disclosure, so the highest levels of disclosure were described as “Fair. ” No companies provided “Fair” disclosure of emissions and a climate change
position, only 7 companies provided “Fair” disclosure of risk assessment, and only 5 companies ranked “Fair” on their disclosure of actions taken to address climate change.
While some climate risk disclosure was common in the electric power, coal, and oil and gas industries, most filings in these sectors lacked the level of detail that investors require. Disclosure in the insurance sector was especially weak, with two thirds of the companies failing to provide any climate risk disclosure. Performance in the transportation sector was also markedly inadequate, with
no companies disclosing GHG emissions associated with vehicle use, a key risk.
Climate change presents a multitude of risks and opportunities, particularly for the sectors evaluated in this report. Despite the clarity of climate science and the host of policies being enacted to combat global warming’s ill effects, our analysis found that disclosure in SEC filings of the implications of climate change for corporate performance still falls short. Investors require standardized, comprehensive climate risk disclosure in SEC filings to adequately assess climate risks and opportunities in their investments. We understand that some companies have taken steps to improve climate risk disclosure in their 2008 annual filings, and we encourage companies to move forward with providing investors with the depth of disclosure as outlined in the Global Framework.
Climate risk disclosure in SEC filings is insufficient to meet investors’ needs largely because the SEC has failed to take actions to highlight its importance. Although pressure from investors has clearly had some effect upon companies’ disclosure practices, companies are unlikely to comprehensively disclose climate risks and opportunities in SEC filings in the absence of clear guidance from the SEC.
Source
Ceres Report on Climate Risk Disclosure (June 2009)
For instance, he says, some disclosure is “very minimal,” where companies simply add a discussion of regulatory developments about climate change to the pre-existing list of risks they include that might affect the company. Others review legislative developments in detail and disclose specific areas where changes could affect the company, and what the likely consequences would be. Still others discuss work on products that use less energy or result in reduced carbon emissions for the customer.
“It’s been like the Wild West,” says Jeffrey Smith, head of the environmental practice at the law firm Cravath, Swaine & Moore. “A lot of it has been very individualized responses to a widely mixed palate of regulatory possibilities.”
Smith says companies “are sharpening their disclosures and routinizing the process by which to assess whether and what disclosure they make.” Any that have been “nibbling around the edges in this area … will now be giving it mainstream treatment.”
Plenty of companies already announced some climate change information outside of their SEC filings, usually in a sustainability report to tout how environmentally friendly the company tries to be. Such details are rarely included in the much more serious format of an SEC filing, however. Smith says finance and legal departments will want to look at what companies say in those non-SEC disclosures, and may sometimes need to reconcile those statements with the formal SEC filing.
“The information in their 10-Ks will need to be more robust, and the information in their sustainability report will have to get vetted more,” he says. “Those two things will have to go into the blender together, and at some companies, it will be the first time that’s happened.”
Sellers says two particular points cited in the SEC in the interpretive guidance could spur more disclosure by companies. First, she says, “A lot of companies were on the fence about talking about physical effects associated with climate change. Since the SEC guidance called attention to that, we might see more companies address that topic.”
The guidance also called for more disclosure of the indirect effects of climate change. While energy companies have been making that type of disclosure for a while, she says, most other companies haven’t. “Indirect effects may be an area where they’ll have an ‘a ha!’ moment,
Smith says some companies are likely to make more robust disclosures related to climate change litigation. He also expects that some will assert climate-change related competitive advantages or commercial opportunities.
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