Tuesday, 9 June 2009

Reporting on climate change risk

In a similar theme to my last post, two reports were published last week in the US looking at the reporting of the risks associated with climate change. They were jointly produced by Ceres, a coalition of investors, environmental groups and others, the Center for Energy & Environmental Security (CEES), which works to develop practical strategies and solutions for moving international society toward a global sustainable energy future, and the Environmental Defense Fund, a non-profit organisation representing more than 500,000 members.

The first report covers trends in climate risk disclosure by the S&P 500 since 1995:

- In total 76.3% of annual reports filed by S&P 500 companies in 2008 did not mention climate change.

- While there has been an increase in the number of 10-K reports that discuss climate risks and opportunities, the quality of coverage is poor - less than 6% of reports filed in 2008 identified and addressed at least one risk posed by climate change.

- Less than 10% of S&P 500 companies in the financial sector discussed climate change in 2008 reports, which is a worry given the risk to the insurance industry and the role of major banks in financing infrastructure projects.

- The utilities sector led the way in discussing climate change in 10-K reports filed in 2008, with only 3.2% of companies failing to mention it. However, the information provided was still of low value.

The second report looked at climate risk disclosures in 10-K (annual report) filings by oil and gas, insurance, coal, transportation and electric power companies. The main findings were that:

- There was limited climate risk disclosure. Out of 100 companies covered, 28 had no discussion of risk assessment, 52 described no actions to address climate change, and 59 made no mention of emissions or a climate change position. Many companies in the insurance and transportation sectors provided no disclosure whatsoever of any climate change-related information.

- The highest levels of disclosure were described as “Fair.” No companies provided “Fair” disclosure of emissions and a climate change position, only 7 companies provided “Fair” disclosure of risk assessment, and only 5 companies ranked “Fair” on their disclosure of actions taken to address climate change.

- Most filings in the electric power, coal, and oil and gas industry sectors lacked the level of detail that investors require. Disclosure in the insurance sector was especially weak, with two thirds of the companies failing to describe any risk. Performance in the transportation sector was also inadequate, with no companies disclosing GHG emissions associated with vehicle use.

The overall conclusion from the two reports was that disclosure on the implications of climate change in SEC filings is inadequate and insufficient to meet investors’ needs. The report lays the blame with the SEC for failing to give clear guidance.

It's all of interest because it shows the extent to which companies are either in denial or as yet unwilling to face up to the consequences of climate change. When they are forced to elaborate on the risks they will also be obliged to describe how they will minimise the impact, part of which will be in using IT to track the risks more closely, make IT solutions more flexible to accommodate inevitable changes and disruption, install more comprehensive business continuity solutions, and much more.

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