Sustainability News: The SEC's Climate Change Announcement

This week's big sustainability event was the U.S. Securities and Exchange Commission's announcement that it has voted to provide "interpretive guidance" on how companies should integrate climate change-related risks into their financial statements.  The news media and blogosphere have both been awash with opinions on whether or not we should think that this is a big deal, so I thought I'd throw one more point of view into the ring.

A brief primer for anybody less familiar with this issue: the SEC requires the companies it regulates (companies whose stocks are traded on U.S. stock exchanges) to file a number of different types of documents throughout the year.  Within these documents, corporations must be rigorous in laying out risks that are "material" to the company's financial performance.  Lists are typically extensive, and it is not uncommon to see climate change-related risks embedded in them.

Yet somehow, climate change still slips by for some firms.  This is despite a number of very good reasons that investors should be worried about issues that fall under this general umbrella.  For one thing, mandatory cap-and-trade regulation is (arguably) becoming closer to reality in the U.S. and already exists within the European Union.  For another thing, even if Copenhagen resulted only in (arguably) lackluster international accords, there's always next year.  Finally, who's to say that rising sea levels--- whether as a result of climate change or not--- aren't a risk to, say, companies insuring coastal real estate.

This is more or less what SEC Commissioner Mary Schapiro said in her speech on January 27th.  "We are not opining on whether the world's climate is changing; at what pace it might be changing; or due to what causes," emphasized Chairman Schapiro.   Instead, she continued, the SEC wants to "ensure that our disclosure rules are consistently applied, regardless of the political sensitivity of the issue at hand, so that investors get reliable information."

The big question on everybody's mind is how significant this move is.  Yes, the guidance will force companies not already focusing on climate change-related risks to refine how they evaluate and articulate certain issues.  But more significantly, there is some sense that this decision is part of a trend---a hopefully ongoing trend-- of climate change mainstreaming.

So what does this mean for the pension funds, socially responsible investors, and NGOs who have been advocating for integration of sustainability reporting into SEC-mandated financial disclosure?  If nothing else, it is a lesson in how such groups have to frame their arguments.  It is not enough to say that any environmental, social, and governance issue has a place within financial documents.  But when the case can be solidly made that specific sustainability risks have the potential to significantly impact financial performance, the SEC may just play ball after all.