The Security and Exchange Commission's new corporate guidance for disclosing climate change risk may signal the end of voluntary sustainability reporting as we know it.
Any notion that companies may have had that voluntary reporting was, in fact, voluntary has now disappeared.
The two key events that have laid this notion to rest were the announcement late last year by the Carbon Disclosure Project that they would be sending out a "Water Questionnaire"; and last week's announcement from the Securities and Exchange Commission suggesting companies “should warn investors of any serious risks that global warming might pose to their businesses.”
First, a little bit of background on the Carbon Disclosure Project is in order. The first CDP questionnaire was sent out in 2003 and now represents over 475 investors with roughly $55 trillion in managed assets. These investors are “asking” companies to disclose their carbon emissions and associated risk (along with potential business opportunities).
This is not an “ask.” There are increasingly few companies that do not respond to the CDP or are on the verge of responding to the CDP this year. Eighty-two percent (over 3,700 companies) of the Global 500 companies (as measured by market capitalization) responded to the 2009 questionnaire. The CDP is now moving ahead with “asking” companies what is their business risk from increasingly scarce water resources.
Now we move to the Securities Exchange Commission's new guidance that companies should report on climate risk to their businesses. The SEC has required companies to disclose possible financial or legal impacts from environmental issues (such as soil and groundwater contamination). However, this is the first time the SEC has specifically cited climate change as having potentially significant business risks (or opportunities).
The SEC’s “interpretive guidance” highlights that companies could be hurt or helped by climate related litigation, business opportunities or legislation. A straightforward example of a potential risk from climate change would be a company that has invested in coastal properties. Rising sea levels from climate change would represent a risk to these real estate investments.
Investors driving increase in transparency
The bottom line with voluntary reporting is that one of the most critical stakeholders a public company has is their investor group. When an investor asks for information on risk from climate change or water scarcity providing an answer is no longer optional.
No public company wants to be in a position of being asked a question they cannot answer. This why most companies are now working on their 2010 CDP responses, perhaps preparing to answer the CDP Water Questionnaire, and now, figuring out how to respond to the SEC guidance on climate change disclosure.