Tuesday, March 16, 2010

The SEC and Climate Change

Putting a price on carbon (one of the objectives of climate change legislation) is intended to capture externalities so that polluters pay for the harm caused by their emissions. One way to put a price on carbon is to require companies to disclose risks related to climate change. As investors weigh the risks, companies that emit carbon will find their cost of capital is being adjusted to account for the risks of pouring carbon into the atmosphere.
Earlier this year the Securities and Exchange Commission (SEC) issued interpretive guidance on how companies should reveal material financial risks related to climate change.
CFO magazine has a summary:
New guidance from the Securities and Exchange Commission was intended to clarify how companies should explain the effects of climate change on their businesses, but last month's 29-page interpretive release may raise more questions than it answers.
Investor groups have long been critical of companies' lack of candor regarding climate-change risk, and of the SEC for allowing them to get away with it.
The SEC is not in the business of setting climate policy, but does set rules to ensure that investors have the information they need to make sound decisions. The SEC’s guidance covers four categories of potential exposure:
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.
For instance, property insurance companies face the risk that beach front property will face higher flooding risks. Coal companies face significant risk that the cost of their products will be affected by new laws or regulations. In the last few years, utilities and energy companies have found it harder to finance coal plants as investors look at higher costs down the road.

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