By: Terry Gibson

Terry Gibson — Wed, 01 Dec 2010 17:56:56 +0000

12.01.10
On January 27, 2010 the SEC voted to provide “interpretive guidance” to existing disclosure requirements as they related to climate change without taking a position on the subject (Shapiro, 2010). Examples of mandatory reporting factors include the impacts of legislation and regulation, impacts of international accords, indirect consequences of regulation or business trends, and the physical impacts of climate change. In other words, some assessment of the risks and opportunities associated with climate change is required under existing regulations because that information is critical to investors. Because existing EU or pending U.S. regulations regarding carbon emissions now have an impact on “a company’s risk factors, business description, legal proceedings, and management discussion and analysis” ( ¶3), the SEC henceforth expects those impacts to appear in company filings.
Trucost (2006) provides an example of how carbon emission disclosure can radically alter perceptions available from an annual report. Under the 2006 guidelines, the 25 utilities that reported a profit all ignored the externality of emissions, which they were legally entitled to do at the time. Under SEC guidelines, only those companies actually paying for or selling carbon credits would legally be able to include those transactions on their financial statements. All others would be required to include a risk and opportunity assessment for various future regulatory environments. However, given that cap-and-trade is established in the EU, will shortly begin in California, and is being considered on a national scale in the U.S., it seems that prudent management would include some discussion regarding the strategy required to most efficiently position the companies for cap- and-trade that must and should be presented in their annual reports. At the very least some consideration of future or pending legislation would provide a more accurate picture of the future cash flow of those companies with carbon emission.
Utilities, refineries and industrial facilities operating in California will begin a cap-and-trade system in 2012, just one year away, in an effort to achieve a 15% reduction in GHG emissions by 2020 (Roosevelt, 2009). As mentioned in the Trucost report, given certain conditions, those utilities that find that they can most easily reduce emissions will do so as long as the price of carbon stays above the investment level of improvements. They can then sell their credits to those utilities that cannot or choose not to invest in lower emission technology.
Under SEC regulations, it is the fiduciary responsibility of management to discuss these options and report their activities, whether pro-active or reactive, in the appropriate sections of the annual report. However, it would be short-sighted for management to concentrate just on carbon emissions as prudent financial risk management requires capital structure that anticipates future risk. It is the responsibility of the company to not only share material information with investors, but to seek out for its own sake all those ESG factors that affect cash flows, insurance exposure, litigation, liquidity and asset management, to list just a few.
Roosevelt, M. (2009, November 24). California pushes cap-and-trade plan. Los Angeles Times. Retrieved from http://latimesblogs.latimes.com/greenspace/2009/11/california-cap-and-trade-plan.html.
Shapiro, K. N. (2010, January 27). SEC Issues Interpretive Guidance on Disclosure Related to Business or Legal Developments Regarding Climate Change. U.S. Securities and Exchange Commission. Retrieved from http://www.sec.gov/news/press/2010/2010-15.htm.
Trucost (2006). Carbon Disclosure Project Report 2006. Carbon Disclosure Project. (p.29-32). Retrieved from http://www.calstrs.com/newsroom/2007/cdp_elecut265_final_report_
electronic.pdf.
Terry John Gibson, RLA
MBA of Sustainable Business Student
Marylhurst University

Comments on: Carbon on Company Balance Sheets?

By: Terry Gibson