We have blogged on several occasions about growing support in the investment community for greater disclosure by public companies of the financial risks posed by climate change (for all relevant posting, see here; for our most recent posting regarding shareholder activism in respect of Shell, see here). Investors and other stakeholders have called upon securities regulators to update their requirements in respect of such disclosure. U.S. investors may get their wish tomorrow. Canadian investors do not have long to wait.

SEC proposal

The U.S. Securities and Exchange Commission will be holding a meeting on Wednesday, January 27 at 10:00 a.m. to consider and vote on two proposals, the second of which is the following:

The Commission will consider a recommendation to publish an interpretive release to provide guidance to public companies regarding the Commission's current disclosure requirements concerning matters relating to climate change.

The recommendation, if endorsed, will have the SEC publish much more detailed guidance on how and what companies are to report with respect to climate change. Ideally, the SEC will require that companies disclose their emissions levels, discuss and quantify both regulatory risks (e.g., costs of complying with cap-and-trade or other emissions reduction obligations) and operational risks (e.g., impact of extreme weather events, changes in demand as a result of legislation), and discuss corporate strategies for addressing such risks and capitalizing on any opportunities created by climate change.

General implications

The guidance is a long time coming. Some groups, like the Investor Network on Climate Risk, have been petitioning the SEC since 2003 to improve its climate change guidance. Forward thinking investors have increasingly recognizing that the legal and physical changes brought about by climate change are financially material. Increasingly, the costs associated with climate change will have to be internalized by companies and will be reflected in the market's valuation of the securities of those companies.

Many large scale emitters will likely be happy to have the SEC tell them what to do about climate change disclosure. Several such companies have been forced by state-led lawsuits, environmental class actions, and shareholder activism to acknowledge that climate change is financially material to their business. SEC guidance would provide a level of clarity and certainty that civil litigation and proxy wars cannot offer.

Ultimately, clearer disclosure requirements should give the market access to the information they need to understand the impact of climate change on the long term value of companies. This improved understanding could drive a significant reallocation of capital that would have the potential to accelerate the transition towards a more sustainable economy.

Canada next

On December 18, 2009, the Ontario Securities Commission ("OSC") issued Staff Notice 51-717 to notify stakeholders of its plans regarding disclosure of corporate governance and environmental matters during 2010. With respect to environmental disclosure guidance, the notice says the following:

"During 2010, we intend to issue a staff notice providing guidance on compliance with existing environmental disclosure requirements under National Instrument 51-102 Continuous Disclosure Obligations. In developing the notice, we plan to consult with our advisory committees and other experts in this area. We intend to publish the notice by December 2010 so that reporting issuers will have sufficient time to consider the guidance when preparing their 2010 annual continuous disclosure documents."

It therefore appears that the OSC intends to prepare environmental disclosure guidance that it will expect reporting issuers to follow when preparing their 2010 annual report.

While the notice only discusses environmental disclosure generally, we expect that the OSC's guidance will deal with climate change issues specifically. In a December 18, 2009 report to the Minister of Finance on the OSC's corporate sustainability reporting initiative, the OSC referred to climate change risk in several places. It also took specific notice of a submission from the British Columbia Investment Management Corporation, Ceres, Climate Action Network Canada and the Climate Change Lawyers Network which included a survey of the annual reports of 35 reporting issuers in Ontario in nine industry sectors with market capitalization of at least CDN $1 billion. The survey found that the disclosure contained poor or limited descriptions of climate change risks, if the issue was discussed at all. The OSC's guidance will likely address this gap in disclosure by providing suggestions as to what should be disclosed where climate change is material for a reporting issuer.

Given the strong linkages between the capital markets of Canada and the U.S., we expect that the OSC (and other Canadian securities regulators) will follow the SEC's lead with respect to climate change disclosure guidance. The outcome of the SEC's meeting tomorrow, and the guidance that it subsequently issues, may therefore help companies anticipate what type of climate change disclosure the OSC will require by the end of 2010.