In the 1970′s the US Securities and Exchange Commission (SEC) issued a rule that corporate registrants include the financial impact of existing environmental risk in their corporate filings. In 2010 the SEC issued amendments to the rule charging companies to identify “the known trend, demand, commitment, event or uncertainty” in their annual 10K report.  The rule states that “there may be significant physical effects of climate change that have the potential to have a material effect on a registrant’s business and operations. These effects can impact a registrant’s personnel, physical assets, supply chain and distribution chain”. The 10K report is signed by the Chief Executive Officer of the company, making climate change as important as the financial information reported to the investors.  

Investors support better SEC reporting because it should provide information on the risks and opportunities that their assets face. In a recent New York Business Journal article Bloomberg CEO Daniel Doctoroff discussed the importance of the SEC disclosure. “If all public companies begin to submit industry-specific (environmental, social and governance) data using the Sustainability Accounting Standards Board (SASB)’s industry-specific metrics, we could see billions, if not trillions, of investment dollars move to companies that take sustainability seriously from those who don’t.”

However, according to some studies, SEC’s greenhouse gas disclosure mandate is followed by only a quarter of companies. The SEC’s plan to make America’s corporation more transparent about their GHG emissions profile is missing the mark. More binding reporting requirements may be required to improve transparency and corporate sustainability.

(Lack of) Carbon Disclosure in the US

Several organizations provide guidelines for monitoring and tracking greenhouse gas emissions and climate related risks to be used in annual filings to the SEC.

The Carbon Disclosure Project (CDP) is a non-profit organization that annually surveys the business world regarding climate change reporting efforts. On their website, the CDP states that it uses “market forces to motivate companies to disclose their impacts on the environment and natural resources and take action to reduce them.”

In conjunction with PwC, the CDP publishes results of its annual survey with the Standard and Poor 500 stock index companies. This is done on behalf of 722 institutional investors registered with the Carbon Disclosure Project representing US$87 trillion of assets under management. In 2012 92% of the companies queried responded to CDP’s survey, but only 25% reported Greenhouse Gas (GHG) information in their 10K filings with the SEC.

In 2013, the Carbond Disclosure Project reported that: 41% of SP 500 failed to report anything on climate change; only 3 comment letters were issued during that year; the disclosure information when made was minimal and didn’t discuss these issues; and that those companies that report through the CDP initiative make more detailed disclosures. Given SEC personnel and funding limitations, enforcement of the disclosure requirement is limited if not negligible. The toughest penalty for not properly reporting risks is simply requiring a company to rewrite the report.  More often, the SEC simply requests more information in the following year’s report.

Ceres, another non-profit organization that also publishes annual reports on carbon disclosure, was critical to the SEC’s management of their 2010 rule. Their report, Cool Response: The SEC & Corporate Climate Change Reporting, points to the SEC as the key regulator to manage corporate disclosure to protect the company’ investors. In examining the state of the SEC’ corporate reporting responses, they found that the percentage of companies making the 10K disclosure is low because SEC is not making reporting on the risks and opportunities of climate change a priority issue.

UK – Enforcing Carbon Disclosure
As a comparison, in 2012 the British government passed a law similar to the SEC rule requiring companies listed on the Main Market of the London Stock Exchange (approximately 2,600 companies) to report on their greenhouse gas emissions as part of their annual Directors’ Report (the analog of the US 10K report). That requirement affects all UK incorporated companies also listed on a European Economic Area market or whose shares are dealing on the New York Stock Exchange or NASDAQ. It is a law, not just a rule, passed by Parliament. It went into effect in October 2013. The UK’s target is to reduce GHG emissions by 80% by 2050.

The UK government has provided Environmental Reporting Guidelines published by the Department for Environment Food and Rural Affairs. The referenced document includes “mandatory greenhouse gas emissions reporting guidance.” The government (through the Department for Environment, Food and Rural Affairs) has also produced a Greenhouse Gas Conversion Factor Respository website and provided guidance on how to assess transport impact, water use, pollution, waste and biodiversity to increase the sustainability.

The CDP also surveys firms in the UK. The British newspaper The Guardian reported that in 2012, 96% of the FTSE-100 share index already reported to the CDP which is modeled on the International Greenhouse Gas Protocol. This is about the same percent as the S&P 500, but will the UK group have a higher compliance rate for the corporate disclosure? This is still unknown since the law just came into effect in October 2013.

Enforcing Carbon Disclosure Regulations
Why does climate change disclosure seem to be more absent in the US? One simplistic explanation is that the politics of climate change are different between the US and the UK (and indeed, the rest of the EU). The United States did not sign the Kyoto Protocol, and there is still a strong and vocal group of climate deniers here.

Without trying to compare legal systems, the SEC’s enforcement language in their 2010 document is limited to reminding companies of their obligations under existing federal securities laws and regulations to consider climate change and its consequences as they prepare disclosure documents to be filed with the agency and provided to investors. They summarize with a statement that they “will monitor the impact of this interpretive release on company filings as part of our ongoing disclosure review program.”

Compare this language with the “Who will enforce mandatory reporting requirements?” used in the UK’s Environmental Reporting Guidelines. Basically, if the annual report or accounts of a company do not comply with the requirements, an order is issued requiring the directors to prepare a revised report. If the company still does not comply, they will be taken to court (although the law clarifies that this solution has not been necessary.) The Committee “raises concerns with companies where there is evidence of apparent substantive non-compliance. It also responds to well informed complaints”.

Taking a Look at the Impact of Regulations on Climate Change
Requiring increased transparency has been shown to be effective at reducing companies’ impact on climate change. For example, CDP has reported some good news on the companies who are looking at their supply chain GHG emissions. The 2013-14 CDP report noted a climate change mitigation impact: of 2.3 million metric tons of emissions reductions generated through supplier involvement. This is good news.

There are 65 firms on the CDP list, from Abbot Laboratories to Walmart with BMW, CSX Corporation (railroad), Johnson and Johnson, Microsoft, Nestle, PepsiCo and The Coca Cola Company to name a few. These companies have demonstrated some surprising results:  Walmart expected in their management efforts that transport fuel would be a major source of GHG emissions, second to purchased energy. In fact refrigerants (the chemicals used in refrigeration machines) were in second place at 12%, and transport fuel was 7% in third. This Walmart webpage and this news article explain how Walmart found numerous ways to save energy, cut costs and reduce carbon emissions in its stores and global supply chain.

More companies are looking into the same thing, and on the subject of refrigerant management, Costco has recently settled with the EPA and DOJ to pay $335,000 in penalties for federal Clean Air Act violations and improve refrigerant management at 274 stores at an estimated cost of $2 million over the next three years.

In the CRE world, there has also been a regulatory push to increase transparency and reduce climate change impacts through measuring and disclosing building’s energy use (See here for more information about Commercal Building Energy Audits). Several states and cities in the US have passed laws related to building energy efficiency disclosure. While this is a different topic in the energy universe, the reporting and disclosure methods should be considered. For example, California’s AB1103 law requires an annual energy efficiency report on all non-residential buildings and a report if the property is being sold, leased, financed or refinanced. There are 12 other states, counties and cities that have similar reporting and disclosure requirements and a number of additional jurisdictions are considering this. Many of the statutes impose fines for failure to comply. Perhaps the SEC will look to these for changes in their approach.

With the UK’s disclosure requirement not even a year old it’s too soon to measure the success of their law. In the US we should look forward to eachieving more thorough GHG disclosure under the SEC.