Giving Climate Change Disclosures a Thought

Recently, the Securities and Exchange Commission (SEC) proposed changes to the disclosure requirements in management’s discussion and analysis (MD&A) of financial condition and results of operations. SEC Commissioner Allison Herren Lee voted against issuing the proposal because it doesn’t mandate a standardized disclosure on climate change risk.

Without a mandatory standardized framework, some companies won’t voluntarily disclose potentially unflattering information, making it difficult for investors to properly compare companies, argued Lee. She says investors have been clamoring for better corporate disclosures about climate change in the past several years and they need consistent and comparable disclosures.

2010 was the last time the SEC addressed the issue of climate change when it published Release No. 33-9106, Commission Guidance Regarding Disclosure Related to Climate Change. That guidance says that companies should inform investors about the risks they face from climate change, including:

• Lawsuits
• Business problems
• Regulatory supervision
• International treaties

Severe weather, rising sea levels, loss of farmland, and the declining availability and quality of water are significant effects of climate change that have the potential to affect a company’s operations.

“Much has changed in the last decade with respect to what we know about climate change and the financial risks it creates for global markets,” Lee said in a statement. “It is also clear that the broad, principles-based ‘materiality’ standard has not produced sufficient disclosure to ensure that investors are getting the information they need — that is, disclosures that are consistent, reliable, and comparable.”

SEC Chairman Jay Clayton, in a public statement accompanying the recent MD&A proposal, said the landscape around climate change disclosures will continue to be complex, uncertain and multinational. Capital allocation decisions based on climate-related factors are substantially forward-looking and likely involve estimates and assumptions that are complex and uncertain. But the SEC’s current disclosure regime is largely based on currently verifiable and largely historic company-specific information.

Clayton said he was interested in learning more about how companies use climate-related models and metrics in their operations and planning, including price, risk and capital allocation decisions, although climate change disclosures aren’t part of the current MD&A proposal. Lee said she was pleased to hear Clayton’s views on climate-related disclosures. “I am hopeful we can work together on this issue going forward,” she said.

For more information about this release, which provides guidance to public companies regarding the Commission’s existing disclosure requirements as they apply to climate change matters, contact us today.

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