The Securities and Exchange Commission (SEC) recently released new guidance requiring public companies to disclose the potential effects of climate change on their operations. We will soon begin to see some changes to annual and quarterly reports.
In particular, a closer look at the business description, risk factors, legal proceedings, and management discussion and analysis sections will show if there are new items that had not been previously discussed. These new items could have material effects on the profitability of the corporate stocks affected by the new regulations.
The SEC's guidance outlines a large number of factors that companies should consider. Here are seven of the most significant items. (Learn more about the SEC in Policing The Securities Market: An Overview Of The SEC.)
- Capital Expenditures Required for Emission Control Systems
Some companies may have to invest considerable funds into upgrading polluting facilities and installing emission control systems in order to comply with increasingly stringent regulations on the emission of greenhouse gases into the atmosphere. This would largely come into play for energy and utility companies operating heavy polluting facilities like refineries and power plants. (Learn more in What Does It Mean To Be Green?)
- Potential Domestic Cap and Trade Legislation
Under this pollution reduction legislation being considered by Congress, companies would be allotted a certain amount of emissions credits, allowing them to legally release only a certain quantity of greenhouse gases into the air. Companies that emit more than their credits allow would be required to buy additional credits, hurting profitability. On the other hand, companies with excess credits could sell them for additional cash.
- Changing Prices for Goods and Services
Even companies that do not produce much pollution may be indirectly affected by climate change laws since their suppliers and/or customers may be affected. It is quite possible that there could be wide-ranging changes in prices caused by things like increased transportation costs or higher electric rates.
- Changing Weather Patterns
According to the SEC's report, climate change is expected to change weather patterns throughout the world. Storms are expected to become more severe leading to a variety of negative consequences. This would likely cause greater losses for insurance companies, and could make oceanic shipping more dangerous in addition to damaging marine life. Established farming areas could become less fertile or lack sufficient rainfall causing losses for agriculture firms.
- Changing Demand for Goods
The combination of changing prices and changing weather patterns would likely cause changing demand for goods. If global temperatures rise, for instance, demand for cold weather products such as heating oil might decline.
- Obligations under the Kyoto Protocol, the European Union Emission Trading Scheme and Other Foreign Regulations
It is important to remember that many public companies have foreign operations, and may fall under the jurisdiction of a variety of different climate change laws and regulations. For instance, while many nations, such as the United States, did not sign the Kyoto treaty, they have operations in nations that are officially attempting to adhere to the protocol mandates. The European Union has an emission credit system which applies to large polluters. It is hard to gauge what might be the potential effects of all of this diverse regulation. Some envision a global cap and trade system as a successor to the Kyoto Treaty, which expires in 2012. (Learn more about globalization and its effects in What Is International Trade?)
- Changing Public Perceptions of Firms
Reputation is supremely important to many businesses. More and more public opinion seems to be turning against firms who are perceived to be over-polluting. Many firms today are working hard to promote a green image. BP is one company that has invested heavily in this trend with its "Beyond Petroleum" campaign. The company has also invested billions in renewable energy projects to prove its sincerity. (Learn more about green investing in Forget Green Stocks, "Green" Will Do and Can Business Evolve In A Green World?)
It will be interesting to see if this new SEC guidance will lead to significant new items being disclosed to investors over the next few quarters. However, I suspect that the potential long-run effects of climate change would likely be so broad and far reaching that even the most competent executives will have trouble anticipating them. At this point though, it appears that heavily-polluting firms are the most likely to be significantly affected in the near term.