Tag Archives: interpretive guidance

Are Your Internal Accounting Processes Ready for the SEC’s Climate Risk Interpretive Guidance?

Sure, there are some business risks that are readily identifiable to conform to the SEC’s Climate Risk Assessment Interpretive Guidance.  Things like:

  • Property damage from storms and sea level changes
  • Increased costs related to new pollution controls and fuels
  • Changes in customer procurement requirements.

But read about the supply chain constraint that the UK energy company E.ON brought forward in a Reuters report:

Lack of investment in the vessels used to build offshore wind farms could hinder Britain’s ambitions to shift to renewable energy, the head of E.ON UK’s Robin Rigg wind project told Reuters at the operations center in Workington, northwest England.

Britain aims to install 32 gigawatts (GW) of offshore wind by 2020, enough to meet a quarter of the country’s electricity needs, and although there has been investment in turbines factories and ports, a lack of vessels could curtail targets.

“The targets are very ambitious and the supply chain isn’t there for it to materialize. It definitely has to grow,” Ian Johnson, Robin Rigg offshore wind farm project manager said. “Aside from turbines, vessels to install equipment are expensive,” said Johnson adding that a lack of predictability over upcoming wind farm projects in the past had caused a squeeze on construction vessels as builders rush to use the small stock already built.

Vessel builders in the past have asked: “When’s the next project going to come along? Where’s the continuity for me in the supply chain?”

Reliance on third parties – over which you have little control – to implement business plans could be an overlooked risk in the context of the Interpretive Guidance.  Further, entering into long-term contracts or guarantees with third parties to ensure infrastructure for deployment create additional financial risks.

Legal Community Begins to Weigh in on SEC Interpretive Guidance

Now that SEC’s Interpretive Guidance has been published, legal experts are beginning to comment publicly about the Guidance, its meaning and implementation.  The legal analyses generally agree that publicly-traded companies will need to significantly change their current environmental risk assessment practices and/or should look to outside experts on risk assessment techniques.

Some of these comments were recently published in an article in Law.com.  Excerpts from that article are below:

Jane Kroesche, head of the West Coast environmental transactions practice at Skadden, Arps, Slate, Meagher & Flom:

… meeting the new requirements will not just be a matter of “plugging language” into the business discussion or legal proceedings section, where companies usually make environmental disclosures.

“It is a very broad-reaching guidance.  It’s important for companies to understand that it’s not just about disclosing the impact from emissions regulations. It goes way beyond that.”

Robert O’Connor, head of the clean tech practice at Wilson Sonsini Goodrich & Rosati:

… the challenge for corporations under these new guidelines will be twofold. Companies must have the infrastructure in place to know whether there is something to disclose. And, they must find out if they are responsible for carbon emissions along their whole supply chain, or just some of it.

“It is very early. For many companies, it will not rise to the level of materiality, but I do think that all companies need to ask the question, ‘Do I have the procedures and systems in place to know one way or the other?'”

Other leading firms have issued client alerts on the SEC’s action.

King & Spalding stated

… companies should ensure that they have sufficient controls and procedures in place to process relevant information. Most companies in the energy and insurance industries have in-house professionals that are well versed in climate change related issues and will be able to quickly make an assessment of whether additional disclosure is required in light of the guidance. However, the guidance could impact companies in a range of industries, some of which may not have regularly monitored these issues in the past. All companies should consider whether additional in-house training or periodic consultation with outside advisors is advisable to supplement existing controls.

McDermott Will & Emery made the following comments:

Under previous SEC guidance… known trends and other uncertain events do not need to be disclosed if they are not reasonably likely to come to fruition.  However, if management cannot make that determination, disclosure is required unless management determines that the occurrence of such known trend or other uncertain event would not be reasonably likely to have a material impact on the registrant’s financial condition or operations.  Registrants should also address in the MD&A, when material, the difficulties involved in assessing the effect of the amount and timing of uncertain events, and provide where possible an indication of the time periods in which resolution of the uncertainties is anticipated.

Elm is unique in our risk assessment experience and capabilities.  We have conducted environmental risk assessments in the past that included detailed reviews of climate risk exposures that are aligned with the SEC’s new guidance.  Please contact us with questions about how we can assist you.