With the fourth anniversary of the SEC’s Interpretive Guidance on climate change disclosure approaching, it’s time to ask: are companies disclosing climate information in SEC filings that’s helpful to investors?
Dow Chemical has a strong track record — with some caveats, as you’ll read below — of publicly disclosing its climate change work.
Why write about a reporting leader instead of a laggard? Leading corporate reporters are best positioned to understand why the SEC guidance is important to investors. They can provide quality reporting, because they have systems in place to collect and report climate information. And they should have good lines of communications between their legal and sustainability teams, to ensure their voluntary and SEC reporting are aligned.
Dow consistently ranks as a sustainability leader. In 2012, it was recognized in the S&P 500 Clean Capitalism and Fortune China CSR rankings, among others. It was named a top performer in its industry in the Dow Jones Sustainability World Index. But Dow still has a big carbon footprint: In June, it ranked 44th in the Political Economy Research Institute’s list of 100 U.S. companies which produce the most GHG emissions.
A recent GreenBiz story by Neil Hawkins, Dow’s VP of global sustainability, says companies must “look ahead and envision what success looks like” and “share their wins, and their challenges, to the benefit of all companies.”
But what about sharing that information with investors? It appears that Dow’s latest 10-K filing does not provide decision-useful climate information, consistent with its voluntary reporting.
I spoke recently with Hawkins, who discussed the quality of Dow’s reporting. The company received an “application level” of A+ from the Global Reporting Initiative for its latest sustainability report. The “A” represents the highest level of completeness in addressing core reporting topics, and the “+” represents external third-party report assurance. Dow provides quarterly updates on progress towards achieving its sustainability targets, and it received 90 out of 100 points for the quality of disclosure in its 2013 CDP response.
Dow’s voluntary reporting and climate change position show that climate change is a major strategic issue for the company. “No one has more at stake in the solution – or more of an ability to have an impact on – the overlapping issues of energy supply and climate change than we do," Hawkins said.
For 23 years, the company has set greenhouse gas reduction goals and tracked progress towards them. In the Ceres Roadmap for Sustainability, a key expectation is that companies reduce greenhouse gas (GHG) emissions 25 percent from their 2005 baseline by 2020. Since 1990, Dow has reduced its emissions by more than 30 percent. Its current goal calls for maintaining absolute GHG emissions below 2006 levels.
These are impressive measures, but it’s time to bring investors into the equation. A key part of the SEC’s mission is to protect investors by ensuring they have adequate information about risks companies face.
The SEC’s climate disclosure guidance, released in 2010, is focused on reporting regulatory, physical and indirect risks, as well as opportunities. While the SEC could do more to educate companies about this issue, the guidance does lay out a clear set of expectations.
When the guidance was issued, SEC Commissioner Elisse Walter explained why more companies should discuss climate risks in their filings:
I am concerned by the fact that today many public companies are in fact providing disclosure about significant climate change related matters through mechanisms outside [of SEC filings]. While all of the information provided voluntarily by companies through these mechanisms undoubtedly is not required to be disclosed under our rules, I do not believe that public companies today are doing the best job they possibly can do with respect to their current mandated disclosures.
Dow’s annual 10-K filing, published in February, provides an incomplete message. Dow devotes four paragraphs to climate change. It’s unclear from the 10-K that climate change is a major strategic issue for the company, and its strategy sounds vague: “Dow will continue to focus on managing its energy and greenhouse gas emissions footprint and delivering solutions to help our customers manage theirs.”
Dow discusses its energy-efficient products, emissions reductions since 1990, the life cycle impact of its products, and several other issues. Yet investors don’t get the full picture of how climate change relates to the company’s business strategy.
The 10-K also says little about climate risks, mentioning some facilities subject to the EU's Emissions Trading Scheme: “[H]owever, the Company has not experienced any considerable impact in regard to regulated GHG emissions from the EU ETS.”
Dow’s voluntary disclosure to the CDP paints a different picture, discussing 15 risks and opportunities in detail. A couple of them may be material in the short term. For example, carbon taxes or energy taxes present an opportunity, according to Dow. In the 1-5 year timeframe, they are “very likely” to result in “increased demand for existing products/services”, with a “high” magnitude of impact on the company.
Dow discusses the potential financial impact of these risks in its CDP response, saying:
All of the regulatory opportunity drivers [carbon taxes, product efficiency standards, and other drivers] will tend to drive the globe towards a low-carbon economy. To further develop these opportunities Dow is actively working to expand existing products and to develop new products that will allow customers to better meet the regulatory requirements.
Dow's 2012 CDP response said, “Dow believes that there is significant opportunity in the space and that it can grow sales of clean energy enabling products from $5 billion per year to $15 billion per year.”
Many S&P 500 corporations say nothing about climate in their SEC filings. What about other chemical companies?
Among the 18 key competitors Dow listed in its 10-K, seven produce annual SEC filings, either 10-Ks or 20-Fs. The others are foreign or private companies that do not report to the SEC.
The SEC filings of these seven companies reveal that only Dupont provided similar climate information to Dow in its 10-K filing. The other companies provided less information, and in one case, no disclosure.
For example, ExxonMobil and Syngenta provided very little information. Exxon mentioned regulatory risks and the general impacts they could have on the company, such as shifting demand towards lower-carbon fuels like natural gas. Syngenta mentioned climate risks and opportunities to agriculture, energy efficiency, and its development of products that are more tolerant of drought, heat, and climate variability.
Owens Corning briefly mentioned climate in a discussion of various environmental regulations which could affect the company in the next 2-5 years. Monsanto did not discuss climate at all.
Dow has taken a good first step towards integrated reporting by discussing climate in its 10-K. There’s room for improvement, though. Investors need to hear about specific material risks and opportunities to make better investing decisions.
A recent Ceres report offers companies an 11-point checklist for developing a climate strategy and improving their reporting. Point 10 is especially relevant, saying, “Be specific: Provide a particularized discussion of climate risks and opportunities with respect to specific company assets and operations.”
Dow’s voluntary disclosure lays out the company’s strategies and its most important risks and opportunities. In comparison, the 10-K says little.
Readers should come away from the 10-K understanding that “no one has more at stake” than Dow on climate change, and how the company’s strategy and actions take that to heart. However, that’s not the case right now.