The New York Attorney General has been investigating Exxon Mobil for failing to disclose to its investors its climate risk, or the risk that climate change may have on the value of the company’s assets, including its extensive oil reserves, which some claim must remain in the ground if necessary future reductions in carbon emissions are to be achieved. As the controversy around Exxon Mobil’s carbon-related financial reporting continues, other entities are moving forward to address so-called climate change or “carbon asset” risk. In fact, the institutional investment fund CalPERS now requires that companies it chooses to invest in have at least one member of its governing board with climate expertise.
Support for changes in accounting standards seems to be growing, as evidenced by a recent climate disclosure task force initiated by the Financial Stability Board to help firms understand, manage, and disclose carbon-related risks. The US Department of Labor also recently issued guidance designed to encourage, although not necessarily require, greater transparency in reporting on climate change risks. Other organizations such as Ceres and the Carbon Disclosure Project have tracked reporting activities and worked extensively with firms interested in implementing carbon reporting, as well as engaged companies to take broader sustainability actions.
In the wake of the UN global climate accords reached in Paris last December, one might suspect that the definition of “fiduciary duty” of corporate boards of directors has fundamentally changed in a post-COP21 world. The UN’s Global Compact offers guidance to boards that choose to take on sustainability broadly as a strategic issue. Given a board’s responsibility to assess climate risk and oversee strategic actions, assessing the firm’s climate risk and disclosing that risk in its financial reporting to investors would seem to be an integral aspect of its role. Yet, clearly, climate and carbon risk reporting is far from universal, just as incorporating sustainability fully into enterprise risk has not necessarily been widely adopted outside the rubric of environmental, social and governance actions.
We have learned through years of climate risk discussions that “climate risk” is an almost meaningless term in the absence of a clear statement of what is meant by “climate… Read more »
Mark Trexler’s comment is spot on. In short, no one can say with any confidence what a company’s “climate risk” is, since projections of future climate conditions are fraught with… Read more »
Interestingly, I think it’s key to draw a distinction between reporting on climate risk (and in particularly the materiality of such risk), and understanding what those risks might be. Very… Read more »
Mark, Your discussion of scenario planning is very relevant to this question and quite interesting. I think it would be quite difficult to assess the risk of carbon policy and… Read more »
Sharon, I’ve also followed a lot of utility IRP reporting over the years, and wouldn’t generally think of it as scenario planning as I conceive of it. Utilities have tended… Read more »
Lewis/Mark: Your arguments against being able to do meaningful climate risk assessment are just arguments against doing any kind of risk assessment. Yes, the future is unknown and fraught with… Read more »
Dan, You very much misunderstood the nature of my comments. I was referring to the challenge of climate risk disclosure, at least in its current form. The fact that climate… Read more »
Mark: Sorry for the misunderstanding.
All exchange traded companies are required to disclose investment risks. Climate risk is a risk (just one that no one has thought about much). So, yes, exchange traded energy company… Read more »
The reality is that most corporate risk disclosure under the existing SEC rules is risk disclosure without any serious attempt at risk assessment. Which should be an oxymoron. Most of… Read more »
I understand your frustration. Trust me, once the SEC would issue disclosure rules (right now they “talking about it”), it will be a whole new ball game — because it… Read more »
The question posed here would seem to imply that such disclosure is not in place and that there are standards established by which to disclose risk. While not yet uniform, such disclosure… Read more »
Gerry, I am aware that the SEC issued its “interpretive guidance” in 2010 to include risks related to climate change in its existing disclosure requirements (which you’ve helpfully linked to,… Read more »
Your points about the SEC are well taken. I was surprised to learn from CERES how very little Obama’s SEC has done with the 2010 guidance. The more publicly-facing debate… Read more »
Picking up a bit on the fiduciary point raised by Lewis, it seems to me that the responsibility of a board of directors has to include requiring a serious assessment… Read more »
Global warming is a risk for the energy industry and society that goes far beyond the normal competitive and market risks of doing business and requires a strong federal government… Read more »
Henry, a good thought! I do wonder how difficult it would be to get any common agreement on what the right scenarios would be. I can see protracted rulemakings looking… Read more »
It will be interesting to see how this discussion topic plays out in real time at the annual shareholder meetings of Chevron and Exxon this week in regard to various… Read more »
According to today’s press, only one of the eleven proposals re carbon risk passed at the Exxon annual shareholders meeting this week, i.e., the one re minority proxies that may… Read more »
Should companies disclose their climate risk? Yes. Pending international, national and state regulations should have put all publicly traded firms on notice that times are changing in ways that are… Read more »
I ran across the results today of this recent survey conducted by MIT and BCG on investors and sustainability: http://sloanreview.mit.edu/projects/investing-for-a-sustainable-future/ Although it’s addressing a larger set of sustainability issues than… Read more »
one source for regulation would be “LEED”. They could step up and require some credits around how much climate impact a building is producing. In the same breathe they could give… Read more »