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Learning Climate Change Risk Avoidance from SEC Guidance

Green business thrives on coping effectively with climate change. We have a huge economy to re-engineer in greener, cleaner methods, and climate change reporting provides information to shape better strategies.

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The Securities and Exchange Commission governs what information must be revealed to the stockholders of public companies. However, their guidelines, while not directly applicable to non-public businesses, organizations or even municipalities -- provide excellent parameters to consider in strategic planning to cope with increasingly volatile weather and natural systems conditions brought about by climate change. Why? A 2007 Government Accountability Office report states that 88% of all property losses paid by insurers between 1980 and 2005 were weather related.

Climate change related disclosures and strategies

As companies grow, they need to prepare for communicating with investors, lenders and even insurance agents who increasingly require climate change related information. It's helpful to start putting your information infrastructure in place to gather, analyze and find the opportunities brought about by your accurate information, analysis and possibilities brought about by change.

Impact of legislation and regulation.

SEC regulations require risk factor disclosure regarding existing or pending legislation or regulation that relates to climate change.

Companies should consider specific risks they face as a result of climate change legislation or regulation and avoid generic risk factor disclosure that could apply to any company.

Management can assess whether any enacted climate change legislation or regulation is reasonably likely to have a material effect on the company’s financial condition or results of operation.

Unless management determines that it is not reasonably likely to be enacted, managers must proceed on the assumption that the legislation or regulation will be enacted. Second, management must determine whether the legislation or regulation, if enacted, is reasonably likely to have a material effect on the organization, its financial condition or results of operations.

Opportunities:

An organization should not limit its evaluation of disclosure of a proposed law only to negative consequences. Changes in the law or in the business practices of some organizations in response to the law may provide new opportunities for companies.

For example, if a “cap and trade” type system is put in place, companies or organizations may be able to profit from the sale of allowances if their emissions levels end up being below their emissions allotment. Likewise, those who are not covered by statutory emissions caps may be able to profit by selling offset credits they may qualify for under new legislation.

Examples of possible consequences of pending legislation and regulation related to climate change include:

  • Costs to purchase, or profits from sales of, allowances or credits under a “cap and trade” system;
  • Costs required to improve facilities and equipment to reduce emissions in order to comply with regulatory limits or to mitigate the financial consequences of a “cap and trade” regime; and
  • Changes to profit or loss arising from increased or decreased demand for goods and services produced by the company arising directly from legislation or regulation, and indirectly from changes in costs of goods sold.

International accords.

Consider impact on your business of treaties or international accords relating to climate change.

We already have noted the Kyoto Protocol, the European Union ETS and other international activities in connection with climate change remediation. The potential sources of disclosure and opportunity related to international accords are the same as those discussed above for U.S. climate change regulation.

Businessess whose businesses are reasonably likely to be affected by such agreements should monitor the progress of any potential agreements and consider the possible impact in satisfying their disclosure obligations.

Indirect consequences of regulation or business trends.

Legal, technological, political and scientific developments regarding climate change may create new opportunities or risks for organizations. These developments may create demand for new products or services, or decrease demand for existing products or services. For example, possible indirect consequences or opportunities may include:
  • Decreased demand for goods that produce significant greenhouse gas emissions;
  • Increased demand for goods that result in lower emissions than competing products;
  • Increased competition to develop innovative new products;
  • Increased demand for generation and transmission of energy from alternative energy sources; and
  • Decreased demand for services related to carbon based energy sources, such as drilling services or equipment maintenance services.

Another example of a potential indirect risk from climate change that would need to be considered for risk factor disclosure is the impact on an organization’s reputation. Depending on the nature of an organization’s business and its sensitivity to public opinion, a management team may have to consider whether the public’s perception of any publicly available data relating to its greenhouse gas emissions could expose it to potential adverse consequences to its business operations or financial condition resulting from reputational damage.

Physical impacts of climate change.

Significant physical effects of climate change, such as effects on the severity of weather (for example, floods or hurricanes), sea levels, the arability of farmland, and water availability and quality, have the potential to affect operations and results. For example, severe weather can cause catastrophic harm to physical plants and facilities and can disrupt manufacturing and distribution processes.

A 2007 Government Accountability Office report states that 88% of all property losses paid by insurers between 1980 and 2005 were weather related.

As noted in the GAO report, severe weather can have a devastating effect on the financial condition of affected businesses.

Possible consequences of severe weather could include:

  • For companies with operations concentrated on coastlines, property damage and disruptions to operations, including manufacturing operations or the transport of manufactured products;
  • Indirect financial and operational impacts from disruptions to the operations of major customers or suppliers from severe weather, such as hurricanes or floods;
  • Increased insurance claims and liabilities for insurance and reinsurance companies;
  • Decreased agricultural production capacity in areas affected by drought or other weather-related changes; and
  • Increased insurance premiums and deductibles, or a decrease in the availability of coverage, for plants or operations in areas subject to severe weather.

Conclusion

The SEC interpretive guidelines are intended to remind public companies of their obligations under existing federal securities laws and regulations to consider climate change and its consequences as they prepare disclosure documents to be filed with us and provided to investors.

We have found these guidelines to be pertinent and valuable for companies, organizations and municipalities of ALL SIZES as we strategize for effective, sustainable functioning during increasingly volatile times brought about by climate change.

Edited by Carolyn Allen
| climate change | emissions | transparency | climate change reporting | strategic planning | cap and trade | green strategy | green business |

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