Tag Archives: carbon disclosure

SEC Votes to Require Public Disclosure of Financial Risk of Climate Change

The Securities and Exchange Commission (SEC) today voted to require public companies to disclose the financial risks they face related to climate change.

In her opening remarks, SEC Chairman Mary Shapiro emphasized that

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.

The Commission is also not considering amending well-defined rules concerning public company reporting obligations, nor redefining long-standing interpretations of materiality.

The vote requires that the SEC develop and issue an “interpretive release” – guidance that can help public companies in determining what does and does not need to be disclosed under existing rules.

Specifically, the SEC’s interpretative guidance highlights the following areas as examples of where climate change may trigger disclosure requirements:

  • Impact of Legislation and Regulation: When assessing potential disclosure obligations, a company should consider whether the impact of certain existing laws and regulations regarding climate change is material. In certain circumstances, a company should also evaluate the potential impact of pending legislation and regulation related to this topic.
  • Impact of International Accords: A company should consider, and disclose when material, the risks or effects on its business of international accords and treaties relating to climate change.
  • Indirect Consequences of Regulation or Business Trends: Legal, technological, political and scientific developments regarding climate change may create new opportunities or risks for companies. For instance, a company may face decreased demand for goods that produce significant greenhouse gas emissions or increased demand for goods that result in lower emissions than competing products. As such, a company should consider, for disclosure purposes, the actual or potential indirect consequences it may face due to climate change related regulatory or business trends.
  • Physical Impacts of Climate Change: Companies should also evaluate for disclosure purposes the actual and potential material impacts of environmental matters on their business.

Although the Commission ultimately voted in favor of the mandate, The NYT reported that Commissioner Kathleen L. Casey said it made little sense to issue such guidance “at a time when the state of the science, law and policy relating to climate change appear to be increasingly in flux.”

The SEC’s interpretive release will be posted on the SEC Web site as soon as possible.

Once the guidance is available, companies will need to review and evaluate the current risk assessment and reporting framework to determine if it is robust enough to comply with the new SEC action.  With our substantial experience with EHS risk assessment and management that extends well beyond basic regulatory compliance, Elm is uniquely suited to assist companies with this.  Please feel free to contact us to discuss further.

SEC to Consider Corporate Disclosure on Climate Risk

The Securities and Exchange Commission will hold an Open Meeting on January 27, 2010 at 10:00 a.m.  At the meeting, the SEC will consider two agenda items, the second of which is a recommendation to publish an interpretive release to provide guidance to public companies regarding the Commission’s current disclosure requirements concerning matters relating to climate change.

See the official announcement here.

Will SEC Heed $500 Billion?

Under current SEC regulations, companies are required to disclose material information or information that an investor should posses in order to decide whether to buy a company’s stock.  But these companies do not routinely include climate-related risks in their filings, nor is the information consistent when it is provided at all.

The California Public Employees Retirement System, which manages $202 billion of assets, and the California State Teachers’ Retirement System, which manages $130 billion of assets, are among 20 investors and groups that petitioned the U.S. Securities and Exchange Commission to issue guidance telling companies to include risks related to climate change in their quarterly and annual filings.

“The SEC should strengthen and enforce its current requirements so investors’ decisions fully account for climate change’s financial effects,” Calpers Chief Executive Anne Stausboll said in a statement.

The initiative hopes to make the most out of the Obama administration’s renewed emphasis on environmental protection, climate change rhetoric and plans to propose an emissions reduction target at the December climate change conference in Copenhagen.

SEC Commissioner Elisse Walter, one of five members who makes decisions on federal securities rules, has said she believes that climate change is a very serious issue and this is the time for the SEC to issue so-called ‘interpretive guidance’ on this topic.

“This (petition) will be taken seriously and be one more piece of influence on the commission, to perhaps get bit more instructive on considering these issues,” said David Martin, a former SEC director of corporation finance — the division in charge of overseeing corporate disclosures. Martin is now in private practice at law firm Covington & Burling.

Debate Over Bolivia Carbon Project Spotlights Risks

The New York Times published an article highlighting questions surrounding a major forest preservation project in Bolivia sponsored by American Electric Power, BP and PacifiCorp, known the Noel Kempff Climate Action Project.

Greenpeace claims it found that from 1997 to 2009, the estimated reductions from the program had plummeted by 90 percent, to 5.8 million metric tons of carbon dioxide, down from 55 million tons. It also questioned the “additionality” of the program, which says that a specific forest area would not have been preserved without the program.

What is striking about this matter is not the debate of the project’s effectiveness (given the on-going controversy surrounding the use of forestry in climate risk management).  The surprise was a comment made by Glenn Hurowitz, a director of Avoided Deforestation Partners, a small nonprofit organization that claims to “advance the adoption of U.S. and international climate policies that include effective, transparent, and equitable market and non-market incentives to reduce tropical deforestation”:

In the proposed climate legislation, you can’t get credit for conservation or any other type of offsets until you’ve delivered the offsets. So inaccurate projections would not affect the issuance of credits.

This statement clearly demonstrates a critical business risk in using forestry for carbon management.

While “inaccurate projections” may not impact the issuance of credits, the sequestration calculations/projects have a significant impact on the upfront project support and financing.

It is reasonable to foresee that a failure of forestry to deliver on its projections will have a severely negative impact on the perception of forestry projects as a financially successful and viable carbon risk management tool.

As with any business investment, financial analyses are based on projections about what an investment will deliver in terms relevant to the investment.  In the case of forestry projects, calculations are completed to determine the amount of carbon that is projected to be absorbed and therefore generate the amount of credits/offsets.  These offsets create a financial return in terms of both cost avoidance and potentially revenue.  Financial analyses may be completed for different carbon management options and an investment is made in accordance with the option judged to be the “best” as defined by the criteria applied by the investor.

So what happens if the projections are inaccurate?  Sure, some offsets will likely be delivered by the project.  But will the investment deliver the anticipated return?  Will a shortfall trigger the need for pollution control investments and/or non-compliance penalties?

There continues to be a critical need to reduce risk in forestry-based carbon management investment.  As we have discussed before, it is advisable to take a deep dive into to uptake calculation methodologies, delivery milestones and scenario planning in advance of such investments.

Word Resources Institute Report: Financial Institutions Should Improve Environmental Risk Identification and Mitigation Efforts

Word Resources Institute (WRI) recently published a new issue brief titled Accounting for Risk.

This publication focused on the myriad issues confronting financial institutions (FIs) when determining and evaluating greenhouse gas (GHG) emission inventories and related risks.  The study concludes that there are a number of benefits to FIs for implementing well-thought out processes for assessing GHGs beyond their direct emissions.

Key risks discussed include:

  • GHG risk impact on new investment opportunities.  This risk may be most prevalent in the power generation sector.  WRI noted

Investments in carbon-intensive projects are no longer a safe bet. Companies, under pressure from shareholders, have been pulling support and cancelling plans to construct new coal plants.

  • Appropriate scope for emissions measurement. WRI contrasts two different scoping approaches – the Operational Control approach and the Equity Share approach.  To illustrate the potential differing results between the two, WRI provided an example.

In 2007, Citi reported its total environmental footprint (scope 1 and 2) at about 1.4 million metric tons of CO2, but estimated its share of CO2 emissions from financing just two thermal power plants to be almost 200 million metric tons of CO2 (~3.3 million metric tons on an annual basis based on a 60 year life). That’s a big difference, and, like Citigroup, most other financial institutions’ traditionally reported scope 1 and 2 emissions will be tiny when compared to their share of emissions from investments.

  • Comparability and reliability of emissions calculation methodologies.  Elm has commented several times on the issues of emissions calculation risks here, here and here.  In its report, WRI echoed our earlier comments and quoted Eliza Eubank, Assistant Vice President of Environmental and Social Risk at Citi:

“If everyone is finding their own way and designing their own methodology, then you really don’t know how to compare different numbers that different people are putting out there.” Without guidelines, deciding what and how to report, “can be a very dicey issue.”

In its summation, WRI stated:

To satisfy internal users (i.e., financial institutions) and external users (e.g., investors, clients, NGOs, regulators), more definitive and standardized [GHG inventory] guidance is needed.

EPA Finalizes GHG Reporting Rule

Just yesterday, we posted about EPA’s GHG rule still being in the proposed status.  Today EPA announced that the rule has been finalized.  The first annual reports for the largest emitting facilities, covering calendar year 2010, will be submitted to EPA in 2011.

Under the rule, fossil fuel and industrial GHG suppliers, motor vehicle and engine manufacturers, and facilities that emit 25,000 metric tons or more of CO2 equivalent per year will be required to report GHG emissions data to EPA annually.

Vehicle and engine manufacturers outside of the light-duty sector will begin phasing in GHG reporting with model year 2011. Some source categories included in the proposed rule are still under review.

The Continuing Carbon Conundrum

In several past articles, we discussed various business risks associated with calculating “carbon footprints” and making investments in climate change or CO2 emissions strategies.  During the last few weeks, more information has surfaced that illustrates an increased recognition of these risks.

The Wall Street Journal reported:

Manufacturers and retailers across the globe are working to measure their products’ carbon footprints for a variety of reasons, and all of the efforts have one thing in common: The results have the appearance of precision.

But all the decimal points in the world can’t hide the fact that measuring carbon footprints is inexact. It is clouded by varying methodologies and definitions — not to mention guesses.

“There are no clear rules for the time being,” says Klaus Radunsky, who co-chairs a group within the Geneva-based International Organization for Standardization that is producing a guideline for measuring products’ environmental impacts. “It depends very much on how you do the calculations.”

The well-regarded law firm of McGuireWoods LLP released an article comparing corporate responses to the Carbon Disclosure Project (CDP) to financial risk discussions/disclosures in the same companies’ 10-K reports for SEC.

[T]he Carbon Disclosure Project (CDP) in September 2008 released the results of its annual questionnaire. According to the CDP, 321, or 64%, of the S&P 500 companies responded to the questionnaire. In contrast, only 19, or 15.4%, of the 123 S&P 500 companies whose 10-Ks we reviewed provided any type of disclosure in their 10-Ks. In fact, at least one of the U.S. companies graded as a “top scorer” in the CDP’s U.S. Carbon Disclosure Leadership Index provided no climate change or GHG disclosure whatsoever in its 2008 10-K.  There may be reasonable explanations for this disparity. However, the fact remains that many S&P 500 companies make extensive disclosures regarding these matters in the CDP and in many cases these companies identify climate change as posing “commercial risk,” having a likelihood of “significant impact” or as a “potential material risk.” and yet they do not reflect those risks in what is arguably their most important SEC report for the year.

Reuters echoed this in a report September 21, 2009:

“European countries do score highly [in the CDP rankings]. Of course, they are subject to a lot more regulation on greenhouse gases so they are more advanced than other places in terms of being able to report complete data,” Zoe Riddell, who produces the annual CDP report, said ahead of its release.

With all this ambiguity surrounding the reporting of GHG/climate risk information, one impact seems to be clear and easier to measure – the growth of “climate change business”:

HSBC, the big investment bank, just tallied up the revenues of listed companies operating in the “climate-change sector.” That includes companies that make low-carbon energy gear; energy-efficiency; and water and pollution management.

The upshot? The sector’s sales worldwide grew 75% last year to $530 billion, the bank reckons. That makes “climate change” a bigger business than wireless telecoms, capital markets, and aerospace and defense. The field is dominated by Germany, France, Japan and the U.S., which led the pack.

As companies look to evaluate climate change initiatives, pressure is mounting on audit functions.  There appears to be a growing – and almost complete – reliance on auditing as THE tool for verifying emissions calculations, reductions, reporting and accuracy.  But without established and auditable standards, what will an audit provide?

The environmental auditing industry is looking for auditing methods/tools that are sound, consistent and pragmatic.  Although EPA has proposed federal greenhouse gas (GHG) reporting requirements, they are not yet final.  Right now, most EHS auditing functions don’t include climate change program elements.  So audits at this time tend to review the management system aspects of GHG emissions management rather than the technical.  Until acceptable and credible standards exist, audits may not be able to provide the level of reliance desired.

AIG Shutters Climate Program, Creates Further Uncertainty for EHS and Risk Managers

Articles from the New York Times and Environmental News Network reported that last month, the world’s largest insurer – American International Group (AIG) – closed its climate change program.  AIG was until recently lauded as a leader in the financial services and insurance industry for its GHG activities.  According to NYT, AIG had

established new goals by inventorying its greenhouse gases and was collecting offsets for a year’s worth of emissions, developing insurance policies for renewable energy providers, and brainstorming for financial instruments that would assist innovators in the green movement.

With the closing of their climate program, the company is no longer calculating its emissions,  ceased efforts to reduce them and canceled its Be Green program,  NYT reported.

“Some people were concerned that if you took an advocacy position [on climate change], that might annoy — that’s a good word — clients,” the articles quoted Joseph Boren, the former CEO of AIG Environmental.

Both articles quoted Richard Thomas, former senior vice president of AIG, as saying that AIG’s decision about its climate change program  “will retard the development of some of the financial instruments to address some of the issues in climate change.” He pointed out that “AIG was a leader in that area, and now because of so much of what AIG did is in disrepute on the financial product side, I think that sends a chill through everyone.”

What does this mean?

Fundamentally, this demonstrates the unrelenting uncertainty of business risk related to climate management issues in the United States.  AIG’s actions are concurrent with federal GHG legislation having passed the House and awaiting Senate action, a President publicly committed to climate action, growing participation in the Climate Disclosure Project (CDP), successful completion of the first phase of RGGI and now Walmart’s supplier sustainability initiative.

Thomas’ statement and the NYT article indicate that some of AIG’s climate solutions were based on complex financial instruments rather than traditional insurance policy structures.  This itself presents an array of questions and possible concerns.  Certainly, the past year has shown the stark downside of AIG’s management of financial products; public and client concerns about the validity of such mechanisms may be justified.

Companies who had hoped to obtain insurance for various climate-related risks may not be able to do so, at least possibly not to the extent originally envisioned.  This places additional burden on companies to identify and assess their climate-related exposures themselves, develop internal management strategies on their own, and reduce reliance on potential insurance policies for financial risk mitigation.

Walmart’s New Supplier Sustainability Index: The Tipping Point?

Walmart has announced sustainability information reporting that will be required by suppliers in order to continue doing business with the world’s largest retailer.  The business community is all a-buzz about Walmart’s launch of their Sustainable Product Index.  See Walmart’s web announcement.

The company will introduce the initiative in three phases.  The first phase will include asking their suppliers to complete a survey of 15 questions (due to Walmart by October 1, 2009) that will serve as a tool for Walmart’s suppliers to evaluate their own sustainability efforts (see attached). The questions will focus on four areas: energy and climate; material efficiency; natural resources, and people and community.

Phase two is a to help create a consortium of universities that will collaborate with suppliers, retailers, NGOs and government to develop a global database of information on the lifecycle of products — from raw materials to disposal. Walmart has provided the initial funding for the Sustainability Index Consortium, and invited all retailers and suppliers to contribute. The company will also partner with one or more leading technology companies to create an open platform that will power the index.

The final phase in developing the index will be to translate the product information into a simple rating for consumers about the sustainability of products.

Given Walmart’s scale, the impact this program could have is enormous. They have now launched ‘the compass’ as to where the retail industry must head to become more sustainable, as well as continue their business relationship with the world’s largest retailer.

One of Elm’s sustainability team members, Liz Muller, was a participant in Walmart’s waste minimization and energy efficiency supplier guides.

Environmental Reports Mitigate Asset Management Risks, But Are Ignored by Bankers

More information is available showing vastly different perspectives on the use of corporate EHS/CSR reports.  But there are opportunities to close this gap.

On one hand, the Asset Management Working Group of the U.N. Environment Programme’s Finance Initiative (UNEP FI) reported that

(There is a) very real risk that (the advisor) will be sued for negligence on the grounds that they failed to discharge their professional duty of care to the client by failing to raise and take into account ESG [environmental, social and governance] considerations

UNEP FI is a partnership between the United Nations and more than 180 financial institutions with over $2 trillion under management.  According to a Reuters report out of London, Paul Watchman, one of the report’s authors said that “money managers have a legal responsibility to raise environmental, social and governance (ESG) issues when tendering investment and advising clients”.

Yet a study earlier this year of the UK banking sector concluded that financial analysts exhibited ” ‘cynicism to complete dismissal’ of all voluntary narrative reporting including social and environmental reports.”

One of the study’s authors, Richard Slack (a Reader in Accounting at the Newcastle Business School at Northumbria University) continued:

Social and environmental reporting was universally considered irrelevant and incapable of influencing a financial forecast… analysts are dismissive of anything other than financial metrics, and they deem large sections of voluntary narrative reporting as useless or worse. Analysts have been shown up to be narrow in their approach, often formulaic and rules-driven, and highly unlikely to be a source of change in respect of social and environmental issues.

Can these opposing views be reconciled?

In our opinion – yes, but companies must truly embrace the idea that the financial industry is a key customer in the context of their EHS/CSR reports.  Doing so will require that EHS/CSR staff look beyond their typical boundaries and comfort zones.  This involves steps like:

-       Establishing working relationships with Investor Relations, Finance, Internal Audit, Accounting and Risk Management functions

-       Gaining detailed understanding the metrics, benchmarks and reporting used by each

-       Understanding what makes financial information credible across different users of the information

-       Developing EHS/CSR metrics that reflect and/or adapt traditional financial metrics used by other company functions that are meaningful to the company’s “financial customers”

Investing time in determining how EHS/CSR reports can provide usable/credible information for the financial community will benefit everyone involved in producing and using the reports.