Full Disclosure: The SEC Approves Requiring Public Companies to Consider and Disclose Effects of Climate Change on their Business Activities

February 5th, 2010

On Jan. 27, the U.S. Securities & Exchange Commission narrowly decided to require public companies to weigh the impact of climate-change laws and regulations in considering which information to disclose in corporate filings. The SEC said companies should also consider international accords, indirect effects such as reduced demand for goods tied to greenhouse gas production, and physical impacts such as the potential for increased insurance claims in coastal regions due to rising sea levels in their assessments.

This increased disclosure properly ensures that investors gain full access to information relating to corporate practices and the impacts of corporate activity on the environment. Some utilities that burn fossil fuels already disclose environmental information, such as the amount of carbon dioxide they emit. For instance, American Electric Power Co., the biggest U.S. producer of electricity from coal, released 148 million metric tons of carbon dioxide in 2008, according to data compiled by Bloomberg. Exelon Corp., the biggest U.S. nuclear-power producer, produced 9.7 million tons of greenhouse-gas emissions in the same year.

However, the power of this SEC decision lies in the increased disclosure that would result, and the resulting benefit to shareholders who, with full information, may invest in corporations that promote environmental well being or minimize environmental harm.

The decision by the SEC comes in light of reports of growth and strong returns from Socially Responsible Investment (“SRI”) Funds who selectively consider corporations and their performance along societal, governance and environmental measures before choosing to invest. Evidence shows that nearly two-thirds of 160 socially responsible mutual funds offered by member companies of the Social Investment Forum outperformed their benchmark indexes and beat the Standard & Poor’s 500-stock index in 2009 by significant margins.

Estimated to encompass nearly $2.71 trillion out of $25.1 trillion in the U.S. investment marketplace today, SRI recognizes that corporate responsibility and societal concerns are valid parts of investment decisions. SRI thus considers the investor’s financial needs as well as the impact of the investment on society and encourages, through shareholder activism, corporate improvements on environmental, social and governance issues.

For some time, ordinary and institutional stockholders as well as insurance regulators have been expressing increasing alarm about the potential costs of climate change on American businesses. Now, with the SEC standard coupled with the demonstrably strong performance of SRI funds, increased consideration of societal, governance and environmental considerations will be made alongside financial measures of corporate performance.

To read the SEC statement announcing this change, click here.

Discussion

From Allison Rohe at 9:47 pm on February 5, 2010:

Firstly, I’d like to commend you and your colleagues for your initiative with this blog. I only came across it yesterday, but I am very impressed and look forward to following your efforts to share and spread pertinent information and encourage dialogue on the issues at hand. I have more experience in Europe than I do in the United States, so I believe your work will prove quite helpful to me to stay abreast of CSR developments in the States.

Next, I wonder what thoughts you might have about calling CSR something that apparently seems the SEC is going to or has mandated, that is, if we assume that CSR is based on voluntary actions and not legal requirements. What I’m asking is, can we then refer to the disclosures made by companies as CSR? I would think not, if we assume the voluntary-nature of CSR. However, the effects of such disclosure would – if SRI trends are maintained – drive companies to either establish or strengthen CSR practices to in turn grow stock value… creating a win-win situation.

Or, perhaps, could this be a new area of CSR in which top down measures – in this case, regulations or laws – could in fact be used by governments or regulating agencies to foment CSR by encouraging society to have greater demands upon enterprises, in this case through society’s investment or divestment based on the companies’ disclosure of the required information regarding corporate practice and its impact on the environment?
From Nicole Skibola at 10:12 pm on February 5, 2010:

Thanks for your comment, Allison. To answer your questions, our ultimate goal is to push “CSR” marketing activities on behalf companies toward implementation of voluntary industry led initiatives and hopefully mandatory law one day.

As lawyers, we hope to encourage businesses to adopt international human rights and environmental standards as a baseline for their practices. CSR then becomes a tool by which those socially responsible companies are rewarded with increased investment, consumer interest, etc., thereby encouraging more companies to follow suit. While most of these guidelines are voluntary at the moment, we understand that this is the first step in creating a movement in socially responsible practices at all levels.

The goal of the SEC decision is to increase the information relevant to shareholder investment decisions. It is not CSR in the traditional sense (a company’s own marketing campaign), but it encourages socially responsible investments through processes of increased transparency. For example, the decision is not meant to directly punish corporations with a large carbon footprint, but to indirectly reward companies with greater ability to guide consumers toward socially responsible investments.

Ultimately, we believe that a top-down approach can be successfully coupled with market approaches to ensuring the promotion and protection of human rights, including environmental concerns. We see the recent SEC decision and the strong performance of SRI funds as a step towards this end.

We, and our readers, would be interested in hearing more about your experiences in Europe, and whether similar government and industry efforts have proved successful in human rights and environmental promotion.

Nicole Skibola and Amol Mehra
Co-Founders and Executive Directors
From Allison Rohe at 6:59 am on February 22, 2010:

Hello again Nicole, I was just reading your response and a few things caught me by surprise, first that RightRespect defines CSR as marketing campaigns – I am interested in learning about this as this definition of CSR is quite different than what I would consider it, at least from the perspective I’ve studied in Europe.

You do, however, specific “traditional” CSR in this regard so I am keen to understand if you have defined it as a marketing campaign because of the misuse (mislabeling) of the concept by so many companies. I would define – perhaps too ideally – CSR as much more than mere marketing schemes; in fact, I would say that social marketing is not and should not be referred to as CSR if it is not aligned with core-business objectives, and aimed at mitigating a social deficit or promoting both business and social sustainability.

Sorry if this is off topic with regard to this post!

Thanks,
Allison (NuDigma)