Climate Risks? The SEC Wants to Know More

By Matthew Mogul

The Securities and Exchange Commission (SEC) will require climate change disclosures as early as 2008. Under pressure from big institutional investors and state officials, federal securities regulators will issue guidance clarifying that certain kinds of climate-related information is "material," meaning it involves significant business risks and must be included in corporate filings under existing law.

Investors want to know more about what firms are doing -- and not doing -- to clean up the environment. They want to know which companies are major emitters of greenhouse gases and thus potentially liable to future lawsuits. They also want to know what plans they have for reducing emissions and how much they will cost. And they want to know which insurance companies are exposed to risk from climate change and to what extent. The push for more disclosure is being led by state pension managers from California to Florida to New York and by big investor groups that control several trillion dollars.

All companies will need to report to shareholders a wide range of information on risks associated with climate change. That includes anticipated hits to earnings as well as capital expenditures due to complying with state and federal environmental laws. They'll also have to acknowledge when the firm's reputation could be tarnished because it's not being "green" enough for investors.

Some oil, power and insurance companies see that it's in their best interests to do so and have already begun disclosing climate change information to investors. In deals struck with environmental activists, American Electric Power, the biggest greenhouse gas emitter in the country, and Cinergy Corp. agreed to report publicly on what they're doing to cut down on carbon dioxide and other harmful emissions. Meanwhile, insurers such as Allstate and MetLife have also started disclosing financial risks tied to calamities like droughts, fires, floods, hurricanes and other climate-driven phenomena.

Others sectors will be forced to follow suit, from banks to retailers to telecommunications firms. Each will also have to disclose and document in quarterly and annual statements everything from loans made to environmentally unfriendly firms to bad building practices polluting the environment.