In a move that could ultimately have a big impact on businesses and Green supply chain activities, the Securities and Exchange Commission (SEC), in a party-line vote, approved "guidance" that requires companies to dlsclose to investors through various financial statements and filings what their level of "climate change risk" is likely to be.

The Green Supply Chain Says: John Chevalier, director of investor relations at Procter & Gamble, sees the requirement as an opportunity for P&G to showcase the work it is already doing and thinks compliance will be fairly painless. What Do You Say? Click Here to Send Us Your Comments Click Here to See Reader Feedback

SEC head Mary L. Schapiro said that the commission was not creating new legal requirements for companies, nor did it intend to endorse any particular scientific or policy view of global warming. She said that including climate risks among other disclosures, such as legal or business risks, was a logical step.

“It is neither surprising nor especially remarkable for us to conclude that of course a company must consider whether potential legislation — whether that legislation concerns climate change or new licensing requirements — is likely to occur,” Schapiro said in her opening statement before last week's SEC vote. “Similarly, a company must disclose the significant risks that it faces, whether those risks are due to increased competition or severe weather. These principles of materiality form the bedrock of our disclosure framework.”

The change is not a new regulation, but rather what the SEC calls "interpretive guidance" on existing regulations and laws, in effect now saying that a variety of issues around climate change should fall within the same scope as other disclosure requirements.

The commission vote was 3-2 to issus the guidance, with the three SEC Democrat commissions for it and the two Republicans against the new guidance. Shaprio said many investors or investor groups were in favor of the change, thought it appears many are against it as well.

Many large companies in the US seem fine with the SEC decision, however.

For example, John Chevalier, director of investor relations at Procter & Gamble, sees the requirement as an opportunity for P&G to showcase the work it is already doing and thinks compliance will be fairly painless for the Cincinnati-based consumer goods giant.

Chevalier doesn’t foresee any substantial change to P&G’s current disclosure practices: "P&G does a very thorough sustainability report, so the content that we would draw from for a more extensive discussion already exists."

Just What is "Climate Risk?"

The tough question and what is at the heart of how this will play out within companies is how to define just what constitute a business risk relative to climate change, given the continuing uncertainty around the entire topic. What if a company does not believe in global warming, for example? Does it still have to disclose climate change risks it does not believe exists? Certsinly, there are likely to be major differences between companies that have similar operating scenarios about what their level of climate risk really is.

The SEC web page cited four specific areas that might trigger risk disclosure requirements (though the full guidance is not yet available):

• Impact of Legislation and Regulation: When assessing potential disclosure obligations, a company should consider whether the impact of certain existing laws and regulations regarding climate change is material. In certain circumstances, a company should also evaluate the potential impact of pending legislation and regulation related to this topic.
  

• Impact of International Accords: A company should consider, and disclose when material, the risks or effects on its business of international accords and treaties relating to climate change.
  

• Indirect Consequences of Regulation or Business Trends: Legal, technological, political and scientific developments regarding climate change may create new opportunities or risks for companies. For instance, a company may face decreased demand for goods that produce significant greenhouse gas emissions or increased demand for goods that result in lower emissions than competing products. As such, a company should consider, for disclosure purposes, the actual or potential indirect consequences it may face due to climate change related regulatory or business trends.
  

• Physical Impacts of Climate Change: Companies should also evaluate for disclosure purposes the actual and potential material impacts of environmental matters on their business.

In other words, a company needs to consider whether, for example, it has real physical risks with regard to eventual climate change (e.g., it has manufacturing facilities near coastlines that could be impacted by rising sea levels) or financial risks (e.g., cap and trade legislation could have a meaningful impact on current strategies or profitability.)

It is likely it will take awhile for the decision to fully have an impact on companies and their reporting, and how the guidance will really be enforced in the end will probably also take some time to play out.

Still, the change will likely spur even greater attention on Sustainability at the CEO and board level, and perhaps serve as a catalyst for companies to accelerate Green supply chain actions today so as to be able to more positively reflect climate change risk that they might incur from carbon emissions regulations or taxes.

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