Ceres Assails Corporate Disclosure on Water Risk – SRI More Powerful than SEC?

Ceres, a network of investors concerned with SRI, environmental organizations and other public interest groups, with analytical support from UBS and data from Bloomberg Environmental, reported on February 10 that the vast majority of leading companies in water intensive industries have weak management and disclosure of water related risks and opportunities.The impact of the Ceres Report may be  surprisingly significant, even in comparison to the SEC's recent, highly publicized guidance on climate change disclosure.

What drives corporate disclosure?  For starters, the rules.  If you want to peddle your stock to  the public, then, in the US,  you are going to start with a prospectus and eventually prepare an Annual Report and Proxy Statement for your shareholders every year, plus quarterly and annual reports filed with the SEC and available on the web.  All these disclosure documents follow forms and regulations created by the SEC, and in some cases the exchange on which your stock is listed.  The corporations follow the rules because the markets expects it, and because the rules are backed by penalties.  The investor can buy or sell stock with some confidence he's not walking into a minefield known only to the corporate insiders.

But there is disclosure and then there is disclosure.  A broad, general statement that “the company may face potential costs from climate change including the cost of complying with possible new regulations on greenhouse gas emissions, possible litigation related to damages allegedly resulting from global warming allegedly caused by greenhouse gas emissions,” etc. has much less impact than, like “Our corporate headquarters will be under water within two decades ” or “If the EPA adopts climate change regulations, our biggest plant will shut down because that sucker will never comply with any serious greenhouse gas limit”.  You never really see any of those specific, stark, the sky is falling disclosures. Nobody wants to scare the stockholders or the analysts.  There are factors that  move disclosure away from the boilerplate and towards a more specific (if temperately worded) risk analysis.  Recent SEC guidance on climate change, for example, will motivate the corporate staff working on the annual report to think a little harder about climate change issues. Not only does the guidance motivate them, it gives them ammunition in any discussion within management about the need for more specific disclosure. 

The SEC enforces its disclosure rules, and the chance that a disclosure document will draw a comment from the SEC staff rises on issues where the Commission itself is interested, but there is another powerful enforcement motivation at work.  A second-guessing, full benefit of hindsight  process called the lawsuit.  Imagine, for a moment, that the Ceres Report highlights Acme Mining as a company that is managing its exposure to water scarcity risk poorly and disclosing it not at all.  Now imagine you are a lawyer drafting the  10K for Acme.  What are you going to include about water risk this year?  Acme's CEO really believes the Ceres report is dead wrong and sees no risk worth disclosing.  Before you agree, consider what will happen if he is wrong and Acme's water scarcity issues lead to  financial losses and a lower stock price. Then you will be talking to the CEO again, about the new lawsuit that Acme is going to lose.  That's part of the power of a report like Ceres – unlike the SEC guidance, it names names and in doing so creates a powerful tool for the plaintiff's bar if an undisclosed water risk actually matures into an expensive disaster.

The fact that the Ceres Report names names also places Acme at some market disadvantage, as investors and customers increasingly look deeply at the totality of a company's resources and situation – whether it's because SRI or sustainability is a goal in and of itself,  or just because they see it as a better path to maximizing profits or reducing supply chain risk.   Between the market impact and the increased potential it creates  for attracting and losing lawsuits on disclosure issues, the Ceres Report  packs a powerful incentive to improve disclosure and management on water risk issues.

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