The new era of climate risk disclosure.(Company overview)

In February of this year, the U.S. Securities and Exchange Commission made clear in no uncertain terms that corporations have a duty to disclose risks faced through potential climate change. Yet many boards remain unaware of what constitutes a "material" climate risk, or just how broad the scope and potential impact truly are.

**********

With the global financial crisis fading, corporate boards and management teams are turning their attention to growth. As part of this shift in focus, they are revisiting emerging risks to assess potential impacts on their companies' prospects. For some business leaders, the risks and opportunities related to energy and climate policy are becoming a significant part of this picture. Increasingly, stakeholders demand more information about the climate-related risks confronting companies--and the strategies management has or will put in place to respond.

The recent SEC guidance does not impose any new climate disclosure rules. However, they raise awareness of the type of risks that could be considered material.

The SEC has recognized these concerns and in February 2010 issued interpretive guidance explaining how companies can disclose climate risks material to them. This action gives greater prominence to these disclosures starting in the 2010 proxy season.

The SEC guidance does not impose any new or modified legal requirements. Under existing rules, companies already had to disclose material risks such as new environmental litigation that could significantly impact their financial position and results of operations.

However, the SEC does raise awareness of the types of risks that could be material and warrant disclosure. In its guidance, the SEC takes a rather broad view of climate-related risk. It describes the obvious risks (such as direct consequences from existing or pending legislation or regulations restricting greenhouse gas emissions), but then goes on to ask companies to consider other risks, including:

* Potential impacts from international accords and treaties related to climate change.

* The indirect consequences of climate change regulation. For example, increased demand for goods that result in lower greenhouse gas emissions than competing products, which may lead to decreased demand for the company's products or services.

* Damage to corporations'--and even to customers'--assets or supply chains caused by floods, droughts, and other severe-weather events.

The SEC commissioners' vote was split three to two on issuing the guidance--a sign of their differing views. In an acknowledgment of current political sensitivities, the SEC chairman said it intended the guidance to be neither a statement on whether the world's climate is changing nor (if it is changing) a statement on what causes those changes. Instead, the SEC stressed that the purpose of the guidance was to ensure companies apply disclosure rules consistently.

It is clear investors will be intensely interested in seeing what companies disclose in reaction to the new SEC guidance. Many …