Risks of “Climate Change”: SEC Highlights Global Need for Business Resiliency Planning and Policies

Posted January 27, 2010 by   · Print This Post Print This Post

On January 27, 2010, the U.S. Securities and Exchange Commission adopted an “interpretive guidance” to public companies on existing disclosure requirements as they relate to business or legislative events on the issue of climate change.   Such “interpretive guidance” is not a new regulation, but serves to express an intention to clarify existing requirements.   It was adopted by a vote of 3 Democrats to 2 Republican commissioners, who in principle are not representing their respective political parties.  The interpretive guidance will have a significant impact, both in the U.S. and across the world, on investor relations, risk management and indirectly on corporate social responsibility.

Impact on Business Continuity and Profitability. Climate change could have material impacts on a company’s business.   Disclosures of the impact of changes in climate – such as more severe storms, a rise in sea levels, increases in the costs of farm products, etc. – could be a “ material” factor for an investor in deciding whether to buy, sell or hold securities in  such a company.    Thus, the issue of climate change has, in a sense, always been a material factor for discussion in management’s general discussion and disclosure of risk factors.

The SEC’s Interpretive Guidance. Quoted below, the SEC’s interpretive guidance on January 27, 2010 highlights several specific areas as examples of where climate change may trigger disclosure requirements:

  • Impact of Legislation and Regulation: When assessing potential disclosure obligations, a company should consider whether the impact of certain existing laws and regulations regarding climate change is material. In certain circumstances, a company should also evaluate the potential impact of pending legislation and regulation related to this topic.
  • Impact of International Accords: A company should consider, and disclose when material, the risks or effects on its business of international accords and treaties relating to climate change.
  • Indirect Consequences of Regulation or Business Trends: 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.
  • Physical Impacts of Climate Change: Companies should also evaluate for disclosure purposes the actual and potential material impacts of environmental matters on their business.

Impact on Global Sourcing. This interpretive guidance is important for outsourcing service providers that support global or globalizing businesses in outsourcing of IT, business processes, call centers, knowledge processing, HR staffing and administration, legal processing and other services.  The possibility of severe storms in a service delivery center should thus be reflected in a disclosure about the susceptibility of such a center to service outages and damages to facilities and resulting consequential damages to the reporting public company.   Such disclosures should consider the related disaster recovery plans and business resiliency plans that might mitigate such outages and lost business.

What does this regulatory concern mean for global sourcing?

  • Corporate Investor Relations. “Climate change” is now on the scoreboard for disclosures by public companies and evaluation by portfolio managers.
  • Corporate Strategy, Business Process Design and Risk Management. Business resiliency measures that relate to climatic conditions have now become a subject of scrutiny.
  • Global Workforce Management. “Climate change” is now a matter of very public concern.  The impact of weather and climate change on a service provider’s capacity to deliver services, as well as on the customer enterprise’s ability to receive services from different service centers, have now become very openly a regulatory disclosure concern.
  • Corporate Social Responsibility.  The interpretive guidance gives a new impetus for corporations, both public and private, to identify their strategies and contingency planning for reducing the impact of adverse climate changes.  While not commanding any CSR initiative, the interpretive guidance will undoubtedly highlight this on the corporate business agenda for branding of “good corporate citizens.”  It could further spur greater interest in measuring and reducing the carbon footprint of publicly traded companies.

Underscoring Existing “Best Practices.” The SEC’s interpretive guidance has given enterprises a clear path on managing risks related to climate change.   This is actually nothing new, since sophisticated service customers have already been demanding disaster recovery plans and contingency sourcing plans as “best practices” in global sourcing.   Such plans require considerable attention to scenario analysis,  alternative sourcing strategies and contingency planning.    Business resiliency planning will require continuing development of policies and procedures, training and testing.  What was a “best practice” has now become an even more compelling “best practice.”

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