The ultimate fate of carbon policies may be up in the air. But utilities and industrial enterprises are still under pressure to report their climate-related activities to investors.

The U.S. Securities and Exchange Commission has voted 3-2 along party lines to force companies to consider their potential exposure to climate change when it comes to filing their financial statements. While the position is one that the Obama administration has advocated, its genesis formed a few years earlier as investor and environmental groups joined hands to petition the body for uniform rules.

"The transition to a carbon-constrained economy is underway, and public access to material information concerning the risks and opportunities that companies face, and their means of addressing those risks and opportunities, is vital to investors," writes the California Public Employees' Retirement System.

The group, which asked the SEC more than two years ago for guidance, says that disclosure should include corporate policies and governance structures related to climate change as well as a tabulation of the registrant's current and forecasted greenhouse gas emissions. As such, investors need to know what the potential financial risks may be along with any climate change-associated litigation.

The teachers' pension fund, which is also part of the same group, commissioned a study that found nearly half of all money managers do not disclose this information. The survey, which interviewed 500 of the largest investment funds, found that 44 percent of them do not consider the ramifications of potential climate rules, noting that at this point that they did not see them as material.

Automakers and utilities, which account for about a third of all greenhouse gas emissions, are the ones that money managers are specifically asked to scrutinize. Even in those industries, the concerned investor groups say that their disclosures vary and therefore make it difficult to evaluate the potential hazards. In some cases generally, they add, the revelations are inadequate.

That's why the SEC has acted. In its decision, the majority said that while it takes no official position on whether climate change is real, businesses must still consider the implications of international accords and potential insurance claims resulting from rising sea levels and melting ice caps.

"I have recently met with a number of experts who analyze the risks and opportunities posed by climate change," says Elise Walters, commissioner for the SEC. "Discussions at these meetings have confirmed my belief that climate change is a very serious issue. And, I believe that it is time for us to consider issuing interpretive guidance regarding disclosure in this area."

Varied Policies

To be sure, the obligation is not universally popular among companies and particularly some oil and gas operators. They say that they are already subject to a variety of state and federal environmental rules, and purchase the best-available technologies. Any further requirements, they add, would place undue burden on them.

In comments to the SEC, the Ultra Petroleum Corp. says that its primary area of operations in Wyoming is one of the most highly-regulated and oil and gas projects in the country. To force it to then conform to stringent climate change reporting mechanisms would allow shareholders to butt their way into decisions that are delegated to management. That would then undermine the company by providing competitors or other interested parties with proprietary information.

"The environmental impact of Ultra's operations is an area that is complex, already highly regulated and that may be increasingly regulated in the days to come," says Judith Little, with Ultra's office of general counsel. "The proposal seeks to 'micro-manage' the company by probing too deeply into matters of a complex nature upon which shareholders, as a group, are not in a position to make an informed judgment."

Of course, any actual laws or federal regulations that seek to bring down the level of carbon emissions would have a tangible effect on business operations. While the regulation is now being challenged, the U.S. Environmental Protection Agency decided in December it will regulate greenhouse gases under the Clean Air Act.

That's a move that John Whitlock, a managing director in Standard & Poor's Corporate and Government Ratings division says will have a "minimal affect" on corporate credit ratings in the short term. If Congress moves instead to enact laws that would accomplish such carbon reductions, it would have more of an impact on credit quality, he says.

Proponents of the new SEC requirement say that regardless of how federal rules and regulations evolve, action is necessary to avoid incongruent climate change reporting policies. Henceforth, those that do not make adequate disclosures could very well be given a competitive advantage over other businesses in the same field.

"Climate change has financial implications for all investors," says Peter Dunscombe, chair of the Institutional Investors Group on Climate Change. "For investors to be able to make informed decisions about the climate risks and opportunities in their portfolios, we need good quality information that is reported in a clear and consistent manner."

A majority of the SEC commissioners are sympathetic and are adding momentum to what is increasingly becoming a carbon-constrained society. The discussion is not a function of whether one subscribes to the notion of man-made global warming; rather, it is a function of whether investors are entitled to know their potential risks. At a time of sagging confidence, that insight could help rebuild debt and equity markets.



 

Copyright © 1996-2010 by CyberTech, Inc. All rights reserved.