In February, the U.S. Securities and Exchange Commission (SEC) released the world’s first economywide guidance outlining climate change disclosure companies should be providing in financial filings.
The guidance, backed by SEC enforcement authority, is likely to improve reporting of climate risks and opportunities, including those related to water. It’s an important first step towards standardized reporting of climate issues for the benefit of investors. Moreover, it is expected to spur increased corporate scrutiny and disclosure of climate and water risks in overseas supply chains.
The SEC guidance was issued in response to petitions in 2007, 2008 and 2009 from investors representing $1.5 trillion in assets. The petitioners included 11 U.S. state and city treasurers and comptrollers, as well as the nation’s two largest public pension funds, CalPERS and CalSTRS. The requests for guidance also received letters of support from 50 additional European and U.S. investors representing $6.5 trillion in assets.
The guidance covers regulatory risks and opportunities, such as the financial impacts of proposed climate legislation before the U.S. Congress and existing regional greenhouse gas (GHG) agreements. It also covers physical risks, including impacts on water availability and quality, and indirect consequences of regulation or business trends, such as increased demand for lower-emitting products or decreased demand for goods that produce significant GHG emissions.
In addition, it clarifies how climate reporting fits into long-established SEC regulations requiring forward-looking disclosure of material environmental risks. Companies should have been reporting these risks for years, but multiple reports released in the past few years show that corporate disclosure has been inadequate.
Water Risks and Supply Chains
The SEC guidance calls attention to the impacts of climate change on water availability and quality, both in a corporation’s direct operations and in its supply chain:
• “There may be significant physical effects of climate change that have the potential to have a material effect on registrants [companies] . . . Changes in the availability or quality of water, or other natural resources on which the registrant’s business depends . . . can have material effects on companies.”
• “Significant physical effects of climate change, such as . . . the arability of farmland, and water availability and quality, have the potential to affect a registrant’s operations and results.”
• The guidance also notes that the physical effects of climate change “can impact a registrant’s personnel, physical assets, supply chain and distribution chain.”
This focus on water impacts has been well received by investors concerned that water risks have been under-disclosed. A 2010 Ceres study found that while many water-intensive companies publicly report some risk information, few reference specific at-risk operations or supply chains, and none attempt to quantify or monetize this exposure.
Because the SEC guidance mentions the strong links between climate change and water availability issues, it could lead to significant new reporting about water risks. In its 2009 10-K filing, the Coca-Cola Company disclosed that "water scarcity and poor quality could negatively impact the Coca-Cola system’s production costs and capacity,” and stated that “climate change may also exacerbate water scarcity and cause a further deterioration of water quality in affected regions, which could limit water availability for our system’s bottling operations.”
In future filings, Coca-Cola and similarly situated companies may provide additional material information by highlighting specific geographies and operations facing higher levels of water risk. For example, it is likely that high growth markets, such as China and India, are precisely those areas where these risks are most significant.