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Clearing the air on climate risk disclosure

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Corporations failing to disclose the risks that climate change poses to their operations and financial health will do so at their own peril as investors continue to pressure companies for transparency and regulators investigate whether a lack of or insufficient disclosure is harming investors.

When the CDP, formerly known as the Carbon Disclosure Project, first launched more than 15 years ago, climate disclosure was nonexistent, but the nonprofit organization now reports that about 5,800 companies representing close to 60% of global market capitalization disclose through it.

“Disclosure was once seen as a smaller or less central activity, whereas now it’s really become mainstream,” said Lance Pierce, New York-based president of CDP North America. “It’s something that investors increasingly expect to see because this type of information is important for the decisions that they make and their investment strategies.” 
Investor pressure is a primary driver of the advances in climate risk disclosure, with shareholder resolutions playing an important role in compelling improvements on the disclosure front, experts say.

About two out of three companies disclose emissions — a number that is likely to rise following early momentum in implementing the Paris climate agreement and the focus on disclosure due to the Task Force on Climate-related Financial Disclosures, which on Dec. 14 released a set of recommendations to guide companies in assessing the material risks climate change poses to their operations and develop plans to mitigate these risks. The recommendations cover four core elements: governance, strategy, risk management and targets.

But investors don’t just want simple disclosure — they expect in-depth disclosures that unveil important information such as company planning for severe weather events and other risk management initiatives, as well as whether companies are using science-based targets for emissions reductions, said Jim Coburn, senior manager of investor programs for Boston-based investor coalition Ceres. A CDP survey released in October found only 94 companies had publicly committed to science-based greenhouse gas reduction targets via the Science Based Targets Initiative.

“Disclosure for its own sake is important, but it doesn’t get to the whole picture,” Mr. Coburn said. “Is a company really a leader in managing risk and reducing emissions enough to have an impact?” 

In 2010, the U.S. Securities and Exchange Commission issued interpretive guidance to clarify what publicly traded companies need to disclose to investors in terms of climate-related material effects on business operations, whether from new emissions management policies, the physical impacts of changing weather or business opportunities associated with clean energy expansion.

“The guidance was important because it was high-level SEC leadership articulating the importance of climate change, but that needs to be matched with the resources for the SEC staff who are actually going to be going out and implementing that policy,” said Jonas Kron, Portland, Oregon-based senior vice president and director of shareholder advocacy for Trillium Asset Management L.L.C.

“There may have been a disconnect there.” However, the SEC’s interest in climate disclosures is likely to change with the new SEC chair under President-elect Donald Trump’s administration, experts say.

“It likely diminishes concerns about federal investigations and actions under the securities laws just given the realities of the next administration,” said Cameron Prell, counsel in the energy group with Crowell & Moring L.L.P. in Washington. “It also probably means that we’re not going to have any governmental action on further guidance as to what is and is not material for purposes of disclosing climate risk information.”

But states are acting to encourage or compel corporations to disclose climate risks to their operations or financial health, so that will keep up some pressure even in the absence of federal leadership, experts said.

“Companies that are carbon-intensive or investors that have heavy carbon-intensive investments in their portfolios need to be at least aware of the trajectory of where the accounting standards and methodologies are, as well as the regulatory obligations,” Mr. Prell said. “More fundamentally, they should probably conduct at least a preliminary audit and stress test of some basic climate risk issues to evaluate what they have or have not done. They really need to get some transparency internally on this. That doesn’t mean that they’re going to be exposed to any regulatory obligations. It’s a prudence issue.”