Financial firms ‘worst’ at climate disclosure – studies

www.environmental-finance.com
4 June

Financial services companies are the worst offenders when it comes to failing to disclose climate change risks and mitigation strategies, which could have serious consequences for investors, two reports on corporate disclosure warn. An analysis of US Securities & Exchange Commission (SEC) documents showed that 76.3% of annual reports filed in 2008 by S&P 500 companies failed to even mention climate change, while only 5.5% identified at least one risk and a risk management strategy.

"Simply including a climate change keyword is not an adequate assessment of climate change risk," said the Reclaiming Transparency in a Changing Climate report by investor coalition Ceres, NGO Environmental Defense Fund and the Center for Energy and Environmental Security (CEES). "But the fact that the large majority of S&P 500 companies neglect to even mention climate risk demonstrates the fundamental failure to implement securities law and protect investors." More than 90% of the financial companies in the S&P 500 failed to mention climate change in their annual reports, a particular concern for investors because of the risks these companies face, according to the report.

Banks, for example, encounter risks through their investments in other sectors and their failure to disclose climate change risks recalls a similar failure to understand and disclose the risks related to the subprime mortgage crisis, said Ehas Quinn, senior policy analyst for the CEES in Boulder, Colorado and a co-author of the report. "It seems like there is an inability by the industry to connect the dots," he said.

Insurance companies face serious risks to their financial stability from the increasing frequency of costly extreme weather events. But 18 of the 27 insurance companies looked at in a companion report made no mention of climate change risks in their securities filings. Only three insurers provided informative disclosure, including actions to address climate change, but they were all non-US companies - Swiss Re, Munich Re and Zurich Financial - showing that European reinsurers are well ahead of their US counterparts on climate change disclosure.

But the National Association of Insurance Commissioners, a coalition of the insurance regulatory officials of the 50 US states, adopted a rule in March that will require insurers with annual premiums of $500 million or more to complete a climate risk disclosure form every year, beginning 1 May 2010. "That could change the landscape and encourage insurers to look at this more closely," said Jim Coburn, manager of investor programmes for Ceres.

Utilities ranked highest in terms of corporate disclosure, with only 3.2% failing to mention climate change, but the overall quality of their disclosure is low because only 35.5% identified at least one risk and mitigation strategy, according to the Reclaiming Transparency report.

Recent settlement agreements between the New York Attorney General's Office with Xcel Energy and Dynegy can provide useful insights into comprehensive, consistent disclosure practices for electric utilities, the authors said. The utilities are required to disclose their climate policies, related litigation and the physical impacts of climate change, including current and projected greenhouse gas emissions, and their corporate strategy to reduce those emissions.

The reports were designed to encourage the SEC to issue formal, standard guidelines for climate change disclosure, so that reports are consistent and allow investors to make "apples to apples" comparisons, the authors said. "That's really hard to do with voluntary disclosures," Coburn said. A SEC spokesman said: "This is an area of great interest and we intend to focus on it once we have completed work on the corporate compensation disclosure proposals."

The Reclaiming Transparency report reviewed more than 6,000 SEC filings by S&P 500 companies from 1995 to 2008 while the companion study concentrated on SEC reports from 100 global companies in five sectors: electric utilities, coal, oil & gas, transportation and insurance.