SEC with a Social Conscience

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It looks like the SEC is beginning to operate with a social conscience.

The U.S. Securities and Exchange Commission (SEC) Wednesday took a step in encouraging public companies to disclose business risks associated with climate change.

The federal regulators issued new guidance that clarifies what publicly-traded companies need to disclose to investors in terms of climate-related ‘material’ effects on business operations, whether from new emissions management policies, the physical impacts of changing weather or business opportunities associated with the growing clean energy economy.

The guidance, the first economy-wide climate risk disclosure requirement in the world, was approved in a 3-2 vote at Wednesday’s SEC Commissioners meeting in Washington. The lack of specific guidance until now has resulted in weak and inconsistent climate-related disclosure by public companies.

The decision comes after formal requests by large investor groups for the SEC to require full corporate disclosure of wide-ranging climate-related business impacts–and strategies for addressing those impacts–in their financial filings. More than a dozen investors managing over $1 trillion in assets, plus Ceres and the Environmental Defense Fund, requested formal guidance in a petition filed with the Commission in 2007.

Specifically, the SEC’s interpretative guidance highlights the following areas as examples of where climate change may trigger disclosure requirements:

Impact of Legislation and Regulation: When assessing potential disclosure obligations, a company should consider whether the impact of certain existing laws and regulations regarding climate change is material. In certain circumstances, a company should also evaluate the potential impact of pending legislation and regulation related to this topic.

Impact of International Accords: A company should consider, and disclose when material, the risks or effects on its business of international accords and treaties relating to climate change.

Indirect Consequences of Regulation or Business Trends: Legal, technological, political and scientific developments regarding climate change may create new opportunities or risks for companies. For instance, a company may face decreased demand for goods that produce significant greenhouse gas emissions or increased demand for goods that result in lower emissions than competing products. As such, a company should consider, for disclosure purposes, the actual or potential indirect consequences it may face due to climate change related regulatory or business trends.

Physical Impacts of Climate Change: Companies should also evaluate for disclosure purposes the actual and potential material impacts of environmental matters on their business.