Landmark SEC ruling calls on firms to disclose climate impacts

In a landmark ruling that could have a major impact on many firms' climate change strategies, the US Securities and Exchange Commission (SEC) yesterday stepped up the pressure to disclose climate-related risks and opportunities as part of their annual reports.

SEC commissioners split along party lines, voting 3-2 in favour of new interpretative guidance that effectively requires firms to disclose business or legal developments relating to climate change.

Under existing SEC rules, listed companies are required to disclose to investors issues that can have a "material" effect on their business operations. Growing numbers of investors have argued that climate-related risks and opportunities constitute a "material" impact, but an absence of clear SEC guidance on climate-related issues has allowed many firms to exclude climate-related effects from annual reports.

Now the SEC has approved new guidance that outlines how climate change could trigger disclosure requirements for firms.

In particular, it advises that firms should assess whether the physical impacts of climate change will have a material effect on their operations and analyse how climate-related legislation and international treaties could impact their business. It also notes that technical and market developments related to climate change could have a material impact on a firm, citing the example of how some firms may face decreased demand for goods that produce significant greenhouse gas emissions compared to competing products.

SEC chairman Mary Schapiro stressed that the guidance does "not create new legal requirements or modify existing ones – it is merely intended to provide clarity and enhance consistency".

However, it does significantly increase pressure on firms to report on climate-related issues in annual reports and should make it easier for investors to challenge firms that fail to provide information on the risks and opportunities they face as a result of global warming.

The decision was hailed as a victory by the Ceres group of investors, which together represents over $1tr in managed assets and has been lobbying hard for the guidance to be approved.

"Today's vote is a clarion call about the vast risks and opportunities climate change poses for US companies and the urgency for integrating them into investment decision making," said Mindy Lubber, president of Ceres and director of the Investor Network on Climate Risk, a network of 80 institutional investors with $8tr in collective assets. "With this guidance investors can make more sound decisions based on better information – and businesses will have a level-playing field with clear standards and expectations for disclosure."