Part 3: U.S. SEC Guidance for Financial Disclosures on Climate Change

Jun 6th, 2010 | By | Category: Climate Change, Environmental Management


Part 3 of 3

Suggestions for Climate Change


On February 2, 2010, the U.S. Securities and Exchange Commission (SEC) published “Commission Guidance on Disclosures Related to Climate Change” (“SEC Guidance”).    There have been many webinars, articles, and briefings on the SEC Guidance.  What will be the effect of this guidance?  Will there be more disclosures in financial filings?  Will those disclosures be useful?  It remains to be seen. 

This is the third of a three-part series to provide greater context on the SEC’s Guidance: what it is, what it isn’t, and what stakeholders should look for (and where) to get the information they want.  The three parts are:

1)      Basics of financial and nonfinancial reporting, and background on this SEC Guidance

2)      SEC Guidance, with analysis of many passages

3)      Suggestions for companies, investors, the environmental community, and other stakeholders


Suggestions for the Environmental Community

The SEC Guidance is an excellent primer on financial reporting and disclosures of environmental matters and provides insight as to how climate change fits into the existing framework.  As Part 2 of this series demonstrated, the SEC repeatedly uses the terms “required” or “reasonably likely”, as well as materiality as the basis for making disclosures in financial filings with the Commission.  The Commission cautioned against making financial disclosures regarding issues that could affect any company. 

If members of the environmental community continue to look to the SEC and its requirements regarding financial disclosures for detailed data and information that is not consistent with the SEC’s mission, they are likely to remain disappointed.  Rather than pressing the SEC to require disclosures in financial filings that are inconsistent with the SEC’s mission (e.g., details, regardless of materiality), the environmental community should redirect its focus to sources of detailed data and information that are available elsewhere.  In fact, the SEC Guidance has provided three very good places to start:  submittals to The Climate Registry and the Carbon Disclosure Project, and companies’ own sustainability reports. 

The author’s suggestions for the environmental community include 

  • Acknowledge universal applicability:  Recognize that the concepts of reasonable likelihood and materiality drive financial reporting and disclosures for all matters, not just climate change or greenhouse gas (GHG) emissions.
  • Monitor disclosures:  Monitor companies’ disclosures in filings with the SEC, but adjust expectations according to the SEC’s mission and concepts expressed in the Guidance. 
  • Look where the SEC suggested:  Recognize the extent of detailed data and information available via channels including the Climate Registry, the Carbon Disclosure Project, and other voluntary GHG emissions reporting channels. 
  • Look elsewhere some more:  Recognize the proliferation of other “voluntary” GHG reporting channels, especially customers.  Look for completeness, accuracy, and support to these submittals. 
  • Seek transparency:  Look for transparency in how GHG emissions reports and GHG emissions reduction projects are reported in these channels.    Work with all these reporting channels to highlight and improve transparency – and your other goals, such as expanding reporting criteria and parameters.
  • Analyze critically:  Subject these reports to critical, independent analysis.  Delve into the details of issues that are important to you. 
  • Value independent involvements:  Recognize that independent evaluation can provide greater confidence in GHG emissions reporting.  Continue to press for appropriate, meaningful involvement of qualified, credentialed independent third parties.  Recognize that there are “certification mills” out there – be as demanding of independent certifiers or verifiers as you are of the companies.
  • Deal with differences:  Recognize that the basis for data and information differs from one reporting channel to another.  This poses a continuing challenge to fit the pieces together to obtain meaningful data and information. 


Suggestions for the Business Community

If directors, officers, and business managers continue with business as usual, it would be easy to miss risks that GHG rules, regulations, voluntary reporting channels, customer requirements, and other commitments could pose to operations and financial requirements.   True, the SEC Guidance did not impose new reporting or disclosure requirements – but that does not mean that investors, the environmental community, non-governmental organizations, customers, and other stakeholders will stop asking for the information.   They will simply get it elsewhere – perhaps from reporting channels you know little about.  If you are waiting for Congress to enact legislation to address climate change, then you are already late.

Suggestions for business leaders include

  • Use the Guidance:  Consider whether financial disclosures are warranted under existing SEC requirements and these guidelines.  Use some disclosures (Xcel and other parties to settlement) as one benchmark.
  • Monitor peers:  Monitor disclosures in industry peers’ financial filings regarding climate change.
  • Monitor legislative activity:  Continue to monitor developments for laws and regulations that would address climate change via regulation of GHG emissions. 
  • Monitor accounting bodies:  Continue to watch the SEC for further guidance, the Financial Accounting Standards Board (or the International Accounting Standards Board) for new accounting rules, and the American Institute of Certified Public Accountants for guidance. Also watch for changes in facts or circumstances that would warrant financial disclosures under current Commission guidelines. 
  • Understand the array of requirements:  Learn the array of other reporting and disclosure obligations that your company currently has.  Learn the history being created by these submittals over time.  Consider that these could be used as the baseline for regulatory purposes, as a performance factor by key customers, or as a minimum standard by investment groups, which would suggest the importance of ensuring that this data and information are correct. 
  • Understand subjectivity:  While GHG reporting and verification appear precise, there is a fair degree of discretion and subjectivity in the field.  Recognize that a carbon footprint is not a commodity – not even a standardized service.  Engage with trusted professionals – in-house or external – to build your systems, controls, and procedures. 
  • Track the full array of requirements and effects:  Industry groups, customers, communities, and other stakeholders may set goals for GHG emissions reductions that affect you.  In particular, customer requirements [Wal-Mart is notably active in this area] are proliferating but are not yet standard.  This poses challenges for data management and reporting, and it could affect your competitive position.  Consider this broad range of requirements and trends as you evaluate the potential financial impact on your company.  All these areas continue to evolve; set up a formal process to monitor developments and trends. 
  • Drive and empower cross-functional teams:  The Chief Financial Officer can be instrumental in leading or driving a cross-functional team to take an enterprise view of all types of potential costs, risks, opportunities, and strategies. 


Whether companies include disclosures about climate change in financial filings, the SEC Guidance reminds companies to consider all applicable factors and to perform reasonable analysis.  “If it’s not documented, it wasn’t done” is a standard saying in business management; the basis for considering financial disclosures for climate change should be documented and revisited routinely (at a minimum, annually; quarterly or upon occurrence of a defined “trigger event” is better practice).  Companies have learned how to develop business processes, institutional controls, and documentation systems for financial reporting.  These can be adapted with the help of specialists to apply to managing a broad suite of risks associated with climate change – including consideration of whether or how to include disclosures in financial filings with the SEC. 

Suggestions for Company (In-house) Staff

Environmental staff often lament about how many times they are contacted only after a problem arises.  The SEC Guidance can be a good vehicle to raise the profile of the environmental function.  Approach Research & Development about taking a Life Cycle Analysis approach for new products or services, and building GHG emissions/ carbon footprint considerations into product design.  Work with Procurement to establish – and enforce – contractual requirements for GHG emissions and performance.  Work with Real Estate to negotiate lease provisions to improve energy efficiencies.  Work with Human Resources on job descriptions, roles, and responsibilities for carpooling, recycling, and other programs.  Work with tax specialists to make the most of tax incentives for investments that reduce energy use.  In fact, it’s a much shorter list of who you won’t be working with than who you will.   Just as the communities involved in environmental and financial reporting have different mind sets (precision vs. materiality, for one), realize that these other functions are in their silos precisely because they are supposed to specialize in these areas. 

No self-respecting consultant would fail to mention that you may benefit from the help of a specialist who has developed, coordinated, or worked effectively with cross-functional teams and can make key provisions of the SEC Guidance relevant for everyone.  You will benefit. 

Author’s Predictions

Since early February 2010, companies have been considering the SEC’s guidance on financial disclosures related to climate change.  Their staff have undoubtedly read other publications, listened to webinars, and assigned responsibilities to accounting and environmental staff.  The author offers some predictions about how the SEC Guidance will affect disclosures in financial filings and stakeholders’ interest in this information. 

Some companies will increase the level of disclosures in financial filings related to climate change.  Disclosures in these filings are likely to be fairly generic.  They may include a standard list of known or potential risks, and general ways that climate change could affect the company.  Financial disclosures are likely to vary by industry sector.  The author believes that few companies will offer specifics on how their business model will change or direct or indirect costs that may be incurred in conjunction with climate change or regulations to address it. 

Companies that are counting on the concern about climate change as a net benefit will provide more disclosures in financial filings than companies that regard it as a net cost.  This would include companies that produce solar cells or wind turbines – and who rely upon these revenues for a material portion of their annual sales. 

The author probably has another dozen predictions, but only one that he is brave enough to put into print:  this won’t be the end of it!

About the Author

Douglas Hileman, P.E., CPEA, has over 34 years of experience in the environmental, safety and sustainability (ESS) fields.  He worked for nine years in industry in environmental operations, corporate ESS program development, and due diligence.  He has 25 years of experience in consulting, including six years as an in-house specialist at PricewaterhouseCoopers LLP.  While at PwC, he supported financial audit teams for environmental liabilities, Sarbanes-Oxley compliance, and business processes, systems and controls.   He has conducted ESS audits of conformance with consent decrees, sustainability data and claims, and many other elements of ESS.  He is on the Board of the Auditing Roundtable.  He is a Certified Professional Environmental Auditor, a Qualified Environmental Professional, and a member of the Institute of Internal Auditors.  He is teaching “Financial Aspects of Sustainability” at UCLA Extension in Spring 2010.  Information on his firm can be found at

Image:  Growing Graph by Christian Ferrari, Italy.

Read the Rest of the Articles in this Series

Part 1 – The Basics of Financial and Nonfinancial Reporting and Disclosures

Part 2 – Detailed Analysis

Part 3 – Suggestions for Climate Change Disclosures

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