Last week the Securities and Exchange Commission took a significant leap into the climate change debate by clarifying the climate-related disclosure requirements for publicly traded firms. Investors and shareholder rights advocates have been calling for increased disclosure about the impact of climate change risks for several years—as evidenced by the emergence of the Carbon Disclosure Project (and existing reporting frameworks such as the Global Reporting Initiative), numerous shareholder resolutions, litigation, as well as petitions by investor groups to the SEC. The new SEC Guidelines do not make new rules—they simply provide guidance about how existing disclosure standards should be applied in the case of climate.
The basic idea behind the guidelines is that companies should disclose “material” information “if there is a substantial likelihood that a reasonable investor would consider it important in deciding how to vote or make an investment decision …” The SEC Guidelines recognize that there are several different ways in which climate change might have a material impact on companies, including: direct increases in the price of energy and/or carbon that might come about through legislation or regulation, physical impacts on plant and equipment depending upon geographic location of firm’s plants, availability of supply for essential inputs, and changes in consumer demand.
In perhaps its strongest-worded statement on current practice, the SEC Guidelines noted that many (but not all) firms are already disclosing significant information through voluntary reporting standards. However, it noted, “Although much of this reporting is provided voluntarily, registrants should be aware that some of the information they may be reporting pursuant to these mechanisms also may be required to be disclosed in filings made with the Commission pursuant to existing disclosure requirements.”
While the impact of these new SEC Guidelines is difficult to predict empirically, this is a very significant step toward making climate change risks more transparent and comparable across firms. In another context, mandatory toxic chemical disclosures had both a significant effect on firm stock prices as well as an impact on overall emissions.[1] Thus, if new material disclosures are made as a result of this ruling, we can expect both changes in market value (as investors adjust their expectation about the future profits of firms) and changes in firm behavior (as firms taken on new initiatives to reduce the impact of climate change on their bottom line).
Mark Cohen is vice president for research at Resources for the Future.
[1] See for example, Konar and Cohen (1997), "Information As Regulation: The Effect of Community Right to Know Laws on Toxic Emissions," 32 Journal of Environmental Economics and Management 109-124.
