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January/February 2009

change on the horizonAssessing the Business Impact of Climate Change

ASTM International Committee Provides Guidelines

These days, the business of doing business includes providing more information about greenhouse gases, and a new task group in Committee E50 on Environmental Assessment, Risk Management and Corrective Action is developing guidelines on how do it.

In recent years, some companies have decided to increase the amount of information they disclose about the impact of climate change on their businesses and vice versa. They are providing this information in response to questionnaires from the nonprofit Carbon Disclosure Project, an international nonprofit organization backed by investors with combined assets of more than $57 trillion under management, and pressure from environmentalists. Some corporations are doing even more.

These firms have concluded that they must discuss climate change-related impact on their business operations and financial performance in reports to the U.S. Securities and Exchange Commission. The number of companies including such information in their SEC filings may increase if the commission issues guidance clarifying the circumstances under which such information is necessary to provide investors with accurate and timely information on the anticipated future performance of a company.

“With more companies deciding that they must disclose potential impacts of climate-change related risks to their businesses, their competitors are feeling pressure to ‘follow suit,’” says Peter L. Gray, partner with the law firm McKenna Long & Aldridge LLP, Washington, D.C., which specializes in environmental law. “The problem with many of these companies is the lack of protocol or accepted norm. The devil is in the details. For example, over what time horizon should the business impacts of climate change be evaluated?”

The pressure is building on the SEC to take action regarding climate change disclosure. In July 2008, Sen. Jack Reed, D-R.I., got language inserted into the funding bill for the SEC, calling on the agency to issue guidance to publicly traded companies about disclosing their financial risk from global warming. A group of large institutional investors asked the SEC last year to assist companies in figuring out how to reveal “material” risks from carbon pollution. The request — which is not binding on the SEC — spurred a small activist investor to request that the agency not issue any rules related to the issue, arguing that the science around the issue remains unsettled. SEC officials have not acted on either request.

This push underscores the growing interest among investors in greenhouse gas information and the growing willingness of companies to give it attention. Largely gone are the days when companies would not admit the problem existed. Now, they not only have to accept the fact of global warming but detail to investors their plans to address it.

“At the end of the day, SEC filings and annual reports are supposed to meet the needs of investors… It’s difficult for the SEC to provide bright-line guidance about that because you are talking about the future,” says Michelle Chan, head of the green investment programs at Friends of the Earth, an organization that advocates for environmental issues. “You can’t say that climate change will impact companies even in the same industries in the same way.”

ASTM Committee E50 Task Group on Climate Change

To help provide guidance to companies, ASTM Committee E50 on Environmental Assessment, Risk Management and Corrective Action has formed a task group on climate change within Subcommittee E50.05 on Environmental Risk Management.

Helen Waldorf, an energy and environment consultant based in Jamaica Plain, Mass., and E50 membership secretary, says that many companies are unsure about what steps to take next given the complex and uncertain regulatory climate. One of the climate change standards projects headed by Gayle Koch, principal at the Brattle Group in Cambridge, Mass., and an E50 member, focuses on financial disclosure issues. Determining the conditions warranting disclosure and the content of such disclosures is not easy.

“There are a lot of other things that you are required to cap,” Waldorf says. “That means lots of big companies are next in the pipeline from a regulatory perspective.”

The committee, which recently met in Miami, Fla., is balloting WK21096, Guide for Disclosures Related to Climate Change Exposures/Risks. The purpose of this proposed guide is to provide a series of options or instructions consistent with good commercial and customary practice for climate change-related disclosures accompanying audited and unaudited financial statements.

Waldorf is leading the development of another standard guide nicknamed CHARM — WK21808, Guide for Climate Change Assessment and Risk Management. The purpose of this proposed standard is to help companies effectively manage the risks associated with climate change. The guide advocates a three-tiered approach to help companies navigate through the often-confusing array of technological and regulatory issues. Tier I discusses simple measures that companies can take in the short run to become more energy efficient, such as installing new storm windows. Once companies undertake these measures, they would be required to verify that they are providing the expected benefits. Firms with 10- to 12-year time horizons may take advantage of Tier II alternative technologies such as wind, solar or geothermal energy. Tier III technologies such as hydrogen fuel cells and carbon sequestration are described for companies with a time horizon up to the year 2050. Waldorf is optimistic that she can have the standard balloted by the subcommittee before its April meeting in Vancouver.

“There is so much happening,” Waldorf says. “Instead of arguing about it, let’s put in a standard.”

Another new standard being considered by this task group deals with how companies can adapt to problems caused by climate change. Among the issues include the restoration of wetlands that have been damaged through destructive weather systems such as hurricanes. (Anyone interested in working on these new E50 standards activities should contact Dan Smith.)

Climate Risk Disclosure, Regulatory Risk and the Cost of Climate Change

Many members of the Fortune 500 already are willing to provide information about their carbon emissions through the Carbon Disclosure Project. It has collected climate change and greenhouse gas emissions from 3,000 of the world’s largest companies.

In 2006, Ceres, a network of individuals and groups working toward sustainability, released what it called a “Global Framework for Climate Risk Disclosure,” detailing investors’ expectations about the CO2 emissions information they want to get from companies, including total historical, current and projected greenhouse gas emissions, a strategic analysis of climate risk and emissions management, an assessment of physical risks of climate change and an analysis related to the regulation of greenhouse gas emissions.

Among the more difficult things for companies to quantify may be the regulatory risk. Ceres is requesting companies provide the financial impact from the greenhouse gas regulations that have been imposed in the countries where they operate along with details about “any known trends, events, demands, commitments and uncertainties stemming from climate change that are reasonably likely to have a material effect on financial condition or operating performance.”

“We have seen an amazing shift over the past three years in how much attention is being given to climate change by government and industry,” says Jim Coburn, senior manager of investor programs at Ceres, Boston, Mass. “The question is not does climate change exist but how should we address it and who should pay the costs.”

Five in Development: Standards Under Way in the ASTM E50 Climate Change Task Group

  • WK21096, Guide for Disclosures Related to Climate Change Exposures/Risks — This draft guide provides a series of options or instructions consistent with good commercial and customary practice for climate change-related disclosures accompanying audited and unaudited financial statements. The guide encourages consistent and comprehensive disclosure of material financial liabilities or exposures attributed to climate change.
  • WK21808, Guide for Climate Change Assessment and Risk Management — This proposed standard provides a uniform set of options for communicating and planning greenhouse gas (GHG) management and strategies for addressing GHGs associated with a firm’s business operations. It provides environmental assessment and risk management strategies for existing corporations, commercial businesses and government facilities, even those currently outside of various voluntary and regulatory schemes. These environmental assessment and risk management strategies recognize the overall value of existing climate change responses, referencing and blending similar, effective programs and extending them to develop and implement a consistent approach that will facilitate communication and an even playing field for business and industry.
  • WK21810, Guide for Integration of Climate Change Risk Management into Sustainability and Greening Programs — This draft guide addresses a series of options or instructions for integrating new risk management practices associated with climate change programs into good commercial and customary sustainability and greening programs for corporations, commercial businesses or government facilities, consistent with various voluntary and regulatory schemes.
  • WK21811, Guide for Using Renewable Energy Projects on Brownfields in Climate Risk Management Strategies — This proposed guide provides a series of options or instructions for developing various types of renewable energy projects on brownfields as part of a corporate, commercial business or government facility’s climate risk management strategy. It can be used in conjunction with the other standards in this series to manage climate risk in an overall sustainability strategy.
  • WK21812, Guide for Adaption Mitigation for Climate Change Risk Management — This draft standard guide addresses practices and recommendations in tiers or planning horizons to address organizational and engineering actions to reduce physical and financial vulnerability attributed to climate change. It reviews available technologies and practices in short, interim and long-term time frames so that an organization can choose actions and increase its adaptive capacity.

Jonathan Berr is a writer, blogger and editor based in Eastampton, N.J. He has written and edited for publications such as, The Philadelphia Inquirer, Business Week, The New York Times and The Boston Globe, among others.