Transparency and Climate Change Risk: Getting the Right Information to Investors
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.
This issue is no longer about science or politics. As SEC Commissioner Luis A. Aguilar emphasized earlier this week, companies need to first measure before they can assess the likelihood of material impacts from potential legislation or impending regulation. The issue is everyday business and disclosure of risks to shareholder investments in public corporations. Therefore it's imperative that companies begin to measure and manage climate change risk as the business issue that it is.
In order for investors to maximize the use of reported data, it is crucial that we drive consistency and comparability. There is currently no global carbon disclosure framework. Many U.S.-based global firms are already reporting in the EU and Australia and several other reporting requirements around the world are emerging, so it is vital that guidance on disclosure of climate change information be as harmonized as possible to minimize the financial and reporting burden for companies.
CDP supports international standardization, most notably through its management of the activities of the Climate Disclosure Standards Board (CDSB).
CDP has worked with board members, including the World Economic Forum and the WRI, and the accounting profession, including PwC, KPMG, Deloitte and Ernst & Young, to develop a global reporting framework based on financial accounting principles that will instruct companies on when, where and how to report on climate change. This will be used by accountancy firms as a standard for climate change disclosure. This is a crucial part of the next steps in carbon disclosure, to create a global framework to drive consistency in data.
The SEC's announcement is an important step toward reminding lagging companies that to avoid examining and addressing climate change impacts on their business is to ignore a potential driver of risks and opportunities. At the end of a good week, we do also need to remember that it is crucial for companies operating globally to have consistency in reporting.
Sonal Mahida is vice president of the Carbon Disclosure Project (CDP), where she currently oversees operations in the United States.
Image CC-licensed by Flickr user Josh Sommers.