Climate change disclosures for large companies hot up on both sides of the Atlantic

12th February 2010

The Securities and Exchange Commission voted at the end of January 2010 to provide public companies with interpretive guidance on existing SEC disclosure requirements.  However, the Commission was at pains to point out that the interpretive release (due shortly) does not create new legal requirements nor modify existing ones, but is intended to provide clarity and enhance consistency for public companies and their investors. 

"We are not opining on whether the world's climate is changing, at what pace it might be changing, or due to what causes. Nothing that the Commission does should be construed as weighing in on those topics," said SEC Chairman Mary Schapiro. "Today's guidance will help to ensure that our disclosure rules are consistently applied." 

Specifically, the SEC's interpretative guidance highlights the impact of legislation and regulation; the impact of international accords; the indirect consequences of regulation or business trends and the physical impacts of climate change.  For example, says the SEC, legal, technological, political and scientific developments regarding climate change may create new opportunities or risks for companies. For instance, a company may face decreased demand for goods that produce significant greenhouse gas emissions or increased demand for goods that result in lower emissions than competing products. As such, a company should consider, for disclosure purposes, the actual or potential indirect consequences it may face due to climate change related regulatory or business trends. 

Meanwhile In the UK the carbon reduction commitment (CRC), a UK-wide scheme to encourage organisations to reduce their carbon emissions, starts in April 2010.

All organisations that had at least one half hourly meter settled on the half hourly market in 2008 will be required to do something under the CRC. Government estimates indicate that around 20,000 public and private sector organisations will be required to participate in some way. The majority of these will simply be required to make an information disclosure once every few years that tells the administrator about their electricity usage. But around 5,000 organisations will be required to participate fully. This means they must not only record and monitor their CO2 emissions, but also purchase allowances equivalent to their emissions each year. 

Qualifying organisations will eventually have to purchase allowances sold by the government for each tonne of CO2 they emit. At the end of 2011, the Government will also start to publish an annual league table showing the best and worst performers. Additionally, they will also start to cap the number of allowances that companies are able to buy, meaning they will be legally obliged to reduce their emissions – a so called ‘Cap and Trade’ scheme. 

But according to recent research commissioned by SAP, UK companies are far from ready for the new legislation.  The research carried out late last year  found that only one third of UK organisations are fully prepared for the CRC, despite being required to register in April this year and 20% have not even started planning or have no idea what measures they need to take.

While a 77% majority of UK enterprises perceive the CRC to be an opportunity to improve their carbon footprint, under half have employed the necessary IT systems to enable this improvement. Of those that do have a system in place to track their progress and manage their carbon footprint, a third is relying on Excel spreadsheets and a further 12% have an internally developed system with not ideal functionality. A clear lack of ownership was also found, with much discrepancy between businesses as to who is responsible for managing CRC compliance, suggesting that whilst aware of the upcoming legislation, many have a great deal of preparation outstanding.

“The research findings highlight a worryingly low level of preparedness amongst organisations for the CRC,” said Simon Godfrey, Sustainability Champion, SAP United Kingdom & Ireland. “Clear governance and ownership for the CRC will be essential to reducing the administrative burden of what will become an annual requirement. At the same time if organisations want to perform well in the league tables they need a comprehensive carbon management system in place to be able to easily collect, gather and analyse data pertaining to their carbon emissions. There is still time to turn this around, but without such clear ownership and effective IT systems in place companies are limiting their ability to turn the CRC from an obligation to an opportunity.”

The survey found also that companies face reputational and financial risk in CRC league tables if they do not put systems in place to reduce emissions:

Organisations’ greatest fear around the CRC is poor performance in the proposed league tables that will show the best and worst CO2 emitters.  For example, the majority of finance enterprises rate CRC compliance as important in their investment decisions. and 44% say they would definitely decline investment to poor performing organizations.

"The CRC Energy Efficiency Scheme is an opportunity and threat for those organisations captured within its net. Those who do not make plans for managing their exposure will find themselves facing stiff penalties. However, those who can plan accordingly and set themselves achievable and sensible targets will find that they can benefit in solid financial ways through the future trading of their CRC credits. With such little time left before the CRC EES becomes mandatory, now is the time to ensure that the business and IT department both work together to ensure an effective plan is in place," commented Clive Longbottom, Service Director, Business Process Analysis, Quocirca Ltd.

The draft CRC Energy Efficiency Scheme Order 2010 has been laid in Parliament and will be subject to Parliamentary approval before it comes into force from April 2010.