The SEC Agenda on Climate

In late September, the SEC published a form letter containing issues they intend to raise re climate risk in public company disclosure documents.

The Commission suggests it might propound questions concerning: transition risks due to climate change impacting business, finance, result of operations, regulatory posture, business opportunities, credit risk or technological change (is there anything omitted?); legislation or regulation likely to affect you; past or future capital expenditures driven by climate; indirect consequences on demand for goods that produce greenhouse gas; increased competition from new products that are less polluting; alternative energy impact; reputational risk; physical effects of flood, hurricanes, sea level change, fire, or water availability; impact of weather on customers; agricultural production impact; cost or availability of insurance; purchase or sale of carbon credits or offsets.

The effect of this focus on disclosure over time will be vast.  Perhaps that is appropriate given current proof of the impact of weather on the economy, governments and individuals– nothing is bigger than weather these days as a major and unpredictable factor in almost everything.

The flip-side is that most of these issues will impact virtually all companies directly and/or indirectly but in ways that are not calculable at this juncture, given actual climate behavior and the ability of companies to respond to changed conditions.  This means long, long disclosures of a general nature, punctuated by those specifics which clearly are on management radar today.  There is a line where fundamental risks are so well and generally known that they do not appear in disclosure (“if an atom bomb falls on Detroit the production of automobiles will be impaired”) and yet people who write disclosure will be loathe to omit very much (“it can’t hurt and after all, it’s true, right?”).  I have never seen the SEC announce what risks need NOT be disclosed, so be prepared for muddied compliance. And for class action lawsuits.

When I have a nightmare and dream I am running the SEC, I dream that I issue guidance as follows: “When completing your climate disclosure you are limited to 1 page and we will not accept any language that tells us that you are at risk from climate change in ways that you cannot now contemplate.  The staff will not take action in the future as to any omitted climate risk from which registrant suffers damage (a)  if  not previously internally identified by the ERM function as material and likely, and (b) which is reasonably expected to have economic impact of less that 15% of net book or annual earnings.”

Why don’t we give the investor the benefit of the doubt that such person actually lives in this century and has at least some contact with reality, or (equally acceptable because it is that person’s investment dollar), if that investor denies climate impact, let him or her invest in that way which is consistent with personal belief?

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