Last year the US Securities and Exchange Commission (SEC) issued interpretative guidance on what public companies should disclose to investors concerning risks related to climate change. While the interpretive release did not create any new legal requirements, it provided SEC registrants a framework by which they could outline climate change-related material risks in annual, quarterly, and proxy statement reports.
For companies that chose to disclose their climate change risks, the SEC’s directive was not necessarily bad news. Climate change could open new opportunities for businesses that offer low-carbon products, benefit from increasing investment in clean energy, or gain revenues from carbon emissions trading markets. While a manufacturing company may face risks from increased greenhouse gas regulations, that same firm could open new markets because of the growing demand for wind turbines around the globe. The public interest group Ceres recently reflected on SEC registrants’ climate disclosure best practices, and found that the most filers needed much more practice articulating their risks associated with climate change.
Ceres concluded that while large companies that register with the SEC have overall improved their climate change risk disclosures in recent years, more work needs to be done. In assessing companies’ quality of reporting, Ceres hardly indulged in grade inflation. No company filings the organization evaluated were deemed “excellent,” few were “good,” and most were “fair” or “poor” in the quality and detail of their climate related disclosures. The issues companies faced are analogous to what advocates of financial and sustainability integrated reporting, like the Global Reporting Initiative, (GRI) must confront: in the United States, numbers talk, and many companies either face difficulty or decline to articulate hard numbers associated with climate change risks.
One reporting star is AES Corp, a global power company based in Arlington, VA. AES disclosed the hard numbers associated with regional greenhouse gas emission requirements, the methodology it used to reach those figures, and the acknowledgement that any actual fiscal impact could be different than the estimated US$17.5 million spent on regulatory costs annually over past decade. Ceres then contrasted AES with Dean Foods. The food processing company and distributor merely stated that its operations are subject to “numerous environmental and other air pollution control laws,” and that new legislation
. . . could require us to replace equipment, install additional pollution controls, purchase various emission allowances or curtail operations. These costs could adversely affect our results of operations and financial condition.
While Ceres laments the vague information and “boilerplate” language that are endemic throughout SEC filings, scant information that often is cut-and-pasted into those filings is a fact of life. In an era of Sarbanes-Oxley regulations and the constant fear that companies will be sued, SEC registrants and their attorneys often use precedent language to protect the companies’ interests and to avoid any unwanted attention. Financial analysts have long caught on to this trend: they skip the text, ignore the flowery text typical of most annual reports (often copied from the 10-K, the equivalent filed with the SEC), and focus directly on the financial tables.
Hence is the reality that advocacy groups like Ceres and standards organizations like GRI will face: “guidance” from the SEC is not legally binding; what we insist is ethical is not necessarily the “law.” Until sustainability data can be broken down into numbers that the financial community will understand and appreciate, do not expect nebulous statements in the pages of 10-Ks or 10-Qs related to social or environmental issues to cease anytime soon.