Climate change and its regulation pose significant risks and opportunities to investors and corporations. The nearly $30 billion in insured losses from Hurricane Sandy alone dramatically underscore this reality. New climate-related federal and state regulations in recent years also present risks and opportunities to companies in the electric power, coal, oil & gas, transportation and insurance sectors. Investors seek greater transparency and disclosure on the business risks of climate change as a means to protect and increase shareholder value.
The key regulator that leads federal efforts to provide investors with information about corporate risks and opportunities is the U.S. Securities and Exchange Commission (SEC). At the heart of the SEC’s mission is the protection of investors through meaningful corporate reporting:
The laws and rules that govern the securities industry in the United States derive from a simple and straightforward concept: all investors, whether large institutions or private individuals, should have access to certain basic facts about an investment prior to buying it, and so long as they hold it. To achieve this, the SEC requires public companies to disclose meaningful financial and other information to the public…. Only through the steady flow of timely, comprehensive, and accurate information can people make sound investment decisions.
The SEC recognized the financial impacts of climate change when it issued Interpretive Guidance on climate disclosure in February 2010, responding to over 100 institutional investors representing $7 trillion who supported the Guidance. The Guidance outlines expectations from companies in reporting on “material” regulatory, physical, and indirect risks and opportunities related to climate change. This report examines the state of such corporate reporting and associated SEC comment letters on climate change. It also provides recommendations for the SEC and companies on improving the quality of reporting. The report examines (1) the state of S&P 500 reporting on climate disclosure and (2) SEC comment letters addressing climate disclosure from 2010 to the end of 2013.
Among our key findings:
The SEC is not prioritizing the financial risks and opportunities of climate change as an important disclosure issue. Based on the low number and content of SEC comment letters in the last four years; the small number of letters to high carbon emitters and insurance companies; the SEC’s decision not to convene a planned 2010 roundtable on climate disclosure; and the lack of SEC public statements, trainings, or supplemental guidance for registrants, it is clear that the SEC has not prioritized improving climate disclosure in financial filings.
The SEC issued 49 comment letters that addressed the adequacy of climate change disclosure in 2010 and 2011, but only 3 comment letters in 2012 and none in 2013. Most comment letters—38—were issued in 2010 following the release of the interpretive guidance. Since then, there has been a significant fall-off in SEC attention to this area.
Most S&P 500 climate disclosures in 10-Ks are very brief, provide little discussion of material issues, and do not quantify impacts or risks. Based on this report’s 0-100 scoring scale, electric power companies received an average score of 16.7 for the quality of their SEC reporting—by far the highest industry average. Even within this group there was high variability in the quality of reporting.
Most S&P 500 companies that disclose via the CDP provide significantly more detailed information in voluntary climate reporting compared to mandatory 10-K filings. Seventy percent of the 332 S&P 500 companies that responded to the 2013 Carbon Disclosure Project questionnaire scored 70 or above on a CDP 0-100 scale designed to evaluate the quality of reporting in response to the questionnaire. Only 14% of the 488 S&P 500 companies that filed 10-Ks in 2013 scored above 5 on this report’s 0-100 scoring scale for their SEC climate reporting. A score of 5 amounts to about one short paragraph or a couple of lines focused on climate-related risks or opportunities.
A large number of companies fail to say anything about climate change in their annual filings with the SEC. Forty one percent of S&P 500 companies did not include any climate related disclosure at all in their 10-K filings in 2013.
As this report shows, over the last four years the state of corporate climate reporting in response to the SEC’s Guidance has improved—at best—marginally. Still, the vast majority of financial reporting on climate change does not meet SEC requirements. Most companies are not discussing company specific material information and are not quantifying risks or past impacts. Most are briefly discussing climate change using boilerplate language of minimal utility to investors, providing few materials details about climate risks and opportunities facing them. We believe Commission staff could make better use of the staff disclosure review and comment letter process to implement the Guidance and, most importantly, improve the quality of climate risk disclosure in mandatory filings. We recommend that SEC staff:
Issue more comment letters to companies with inadequate disclosure of material climate risks
Focus on companies in sectors facing significant climate risks and opportunities when reviewing corporate filings.
Focus on the adequacy of disclosures concerning recent, major regulatory developments when reviewing corporate filings.
Where reporting appears inadequate, compare SEC filings with a company’s voluntary disclosures.
Create a federal interagency working group focused on climate risks and opportunities to businesses, and an SEC task force focused on reviewing climate change disclosures