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SEC Offers Climate Change Guidelines. But At What Cost?

February 1, 2010

In late January and just as many publicly-traded companies were preparing their annual reports, the U.S. Securities and Exchange Commission published a 29-page release on how, when and if those companies should disclose risks and costs associated with greenhouse gas emissions and climate change to their stockholders.

Companies are already required to disclose how pending litigation and potential legislation might affect their bottom lines. The SEC, in fact, is quick to point out that its new guidelines do not actually change or codify any laws. Rather, they simply reinforce the concept that any risks — even climate change — could be material and thus subject to public disclosure.

SEC Chairman Mary Schapiro said this: “We are not opining on whether the world’s climate is changing, at what pace it might be changing, or due to what causes. Nothing that the Commission does today should be construed as weighing in on those topics. Today’s guidance will help to ensure that our disclosure rules are consistently applied.”
Many companies already disclose risk associated with climate change and their emissions. Now, they must take into account potential costs stemming from state and federal cap and trade legislation, possible new EPA oversight, and even foreign treaties on climate change. Much of this remains hypothetical. Particularly if you consider that risks could include flooding or damages caused by increasingly intense storms or even extended droughts that dry out water sources.

Since the guidelines were released, there have many critics, including Senator John Barrasso (R-Wy.) who late last month introduced legislation to stop them.

So, despite the SEC’s new guidelines, many companies are facing uncharted territories when it comes to due diligence and climate change. And now that the SEC’s guidelines are public, the danger of not reporting these risks only goes up. Not only from the regulatory and enforcement perspective, but also from the potential for new shareholders lawsuits.