Transparency and Climate Change Risk: Getting the Right Information to Investors

Published January 29, 2010

This week was a good week for those wishing for greater transparency on climate change risk.

The U.S. Securities and Exchange Commission has provided greater clarification on the reporting of material risk associated with climate change driven by regulation at national and international levels, physical impact on business, and the indirect consequences of regulation on business trends, such as changes in the demands for goods.

At the Carbon Disclosure Project (CDP), we see this as an important step in helping U.S. companies better report material climate change impacts to their investors.

Thousands of global companies, including many S&P 500 firms, have disclosed climate-related business risks to their major shareholders since 2003 using the CDP process. Where these risks are material, companies are required to disclose them to the SEC. However, companies have not all interpreted this requirement in the same way and disclosure to SEC has been varied, so we welcome SEC guidance that will bring greater clarity to companies and ensure full disclosure of material risk to shareholders.

The risks and opportunities associated with climate change are multifaceted with diverse aspects ranging from strengthening consumer relationships and enhancing brand image to compliance costs driven by regulation or legislation.

U.S. companies have shown that they are up to the task of identifying these risks. The majority of the S&P 500 is already identifying risks in the areas highlighted by the SEC through CDP. However, the SEC's decision sends a strong signal to the management and boards at those companies who do not exercise diligence in considering the strategic and economic consequences of climate change.

This is all about ensuring that investors get the right information. The mandate of the SEC is to protect investors, institutional and individuals alike, and ensure they receive information crucial to sound investing in capital markets. The SEC interpretative guidance acknowledges that climate change has the potential to create material risk, takes a balanced approach and steers clear of making political statements.

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