New SEC Guidance on Climate Change Risk Disclosure – Part 3

In our last article, we examined the details and requirements of the new SEC guidance. In this article we will discuss the steps to assess and measure risk, potential benefits of a certification program, and also how climate change disclosures can be applicable to non-public companies.

Practical Steps to Assess and Measure Environmental Risk

What steps should a public issuer take to assess and measure its environmental compliance risk?

Some companies approach environmental compliance in an overly simplified manner: do what the law requires and nothing more. While this is not a bad starting place, it is not a complete answer and it does little to help public companies assess their risks for disclosure purposes.

In the same way that public companies adopted risk assessment methods for the assessment of control risks when making their certifications of internal control adequacy for Section 404 of the Sarbanes-Oxley Act, public companies should also adopt risk assessment methods for environmental risks. (While the assessment method may be the same as that adopted for Section 404 purposes, it does not necessarily have to be the same.)

An assessment method will identify the universe of compliance risks and, for each risk, assess its immediacy, its potential impact, and methods for controlling that risk. A rigorous control protocol will also track the design and implementation of controls for material risks and include a testing or audit regime to test both the design and the efficacy of those controls.

The COSO methodology adopted by most public companies for Sarbanes-Oxley Section 404 controls provides a convenient approach for developing environmental risk assessments and controls. In addition, an alternative environmental management system such as ISO 14001:2004 (International Standards Organization) may also apply.

ISO 14001:2004

The ISO 14001:2004 system was referenced in Executive Order 13423, which directed federal agencies to adopt systems for improving environmental compliance, reducing the consumption of natural resources and reducing air, water and waste emissions and improving overall environmental stewardship. As applied to federal agencies through subsequent government announcements, it requires federal agencies to implement plans to:

• Educate employees on environmental and sustainability issues;
• Implement procurement practices to reduce energy usage and improve sustainability;
• Reduce water consumption;
• Shift power consumption from fossil-intensive methods to green or renewable methods of power production;
• Reduce environmental impacts by shifting to more efficient buildings, production systems and transportation systems; and
• Reduce the environmental impact of the disposal of electronic devices by improving disposal methods and encouraging the use of electronic devices with minimal environmental impact upon disposal.

Through its rigorous method of identifying, assessing, controlling and managing risk, the ISO: 14001:2004 method (or equivalent) has been adopted by federal agencies for their compliance with Executive Order 13423. Likewise, public issuers might also adopt that same method.

An environmental assessment and management system under ISO 14001:2004 embraces the concept of Plan, Do Check and Act (PDCA), a system made popular by Dr. W. Edwards Deming, considered by many to be the father of modern quality control. Once Objectives, Roles, Resources, and Procedures are put in place, a GAP analysis is performed to identify areas of non-conformity or non-compliance. An Implementation phase is initiated, followed by monitoring and review to identify areas of opportunity for improvement. The system also calls for the establishment of a continuous improvement process.

ISO 14001 – Good for the Banking Industry?

ISO 14001:2004 is not industry specific and therefore lends itself for use by a myriad of industries and organizations, including banking. In 1999, UBS was the first international bank to obtain ISO 14001 certification for its worldwide environmental management system. Even local banks have seen the value in ISO 14001. Alpine Banks of Colorado has earned and re-certified in the ISO 14001 standard since 2006, and has won many awards for its sustainability initiatives, including the Green Leaf Award from Bank News. The time frame for the entire process, from start through certification can vary dramatically based upon a variety of factors including organization size, number and locations of branch operations, type of industry, management buy-in, and staff training. Organizations which currently have an established management system, such as ISO 9001:2008, already have an existing framework and understanding to more easily and quickly implement an ISO 14001:2004.

Typically, an organization should be ready to allocate at least 5 months and sometimes up to one year to reach certification status. Organizations have several options for implementation. The traditional method is to utilize the services of professional consultant/trainers. Additionally, with the growth of ISO 14001:2004, there are now a number of software programs which have been primarily developed to assist organizations in streamlining their record keeping and reporting responsibilities. Worldwide, as of 2007, over 154,000 certificates have been issued to organizations in 148 countries.

Measuring Greenhouse Gas Emissions

As GHGe (Green House Gas Emissions) have become the accepted unit of measurement for reporting and regulatory purposes, ISO has incorporated these measurement and reporting tools within the ISO 14001 family. ISO 14064 parts 1, 2 and 3 are international greenhouse gas (GHG) accounting and verification standards which provide a set of clear and verifiable requirements to support organizations and proponents of GHG emission reduction projects. ISO 14065 complements ISO 14064 by specifying requirements to accredit or recognize organizational bodies that undertake GHG validation or verification using ISO 14064 or other relevant standards or specifications.

It would follow therefore, that properly initiated, an environmental management system would include all conceivable steps in assessing, measuring and mitigating risk. Reverting our focus back to the various disclosure requirements which were enumerated in part 2 of this series, now armed with real data, measurements and impact reduction objectives, an issuer could conceivably translate that to a more positive disclosure report.

Private Companies

While this series has focused on the SEC Guidance and its effect on public companies, there have been some regulatory actions proposed and adopted that could affect private companies. The EPA recently issued reporting requirements for 10,000 facilities in the U.S. At present, those reporting requirements are mostly applicable to mining, minerals production, wastewater treatment and carbon dioxide sequestration facilities, but the EPA has suggested that it intends to broaden the scope of its GHGe reporting requirements over time. The most recently adopted provisions, announced in late June 2010, will begin taking effect in 2011.
On the legislative front, the proposed Kerry-Lieberman Bill (American Power Act) sets up a framework for cap and trade: the buying and selling of carbon credits. Other bills have also proposed cap and trade arrangements. While there can be no guarantee legislation of this type will be adopted in the U.S., the European adoption of cap and trade following the Kyoto Climate Change Protocol, indicates that the cap and trade framework is one that will be on the horizon for some time to come if it is not adopted in 2010.

Regardless of whether environmental reporting is legally mandatory, companies that wish to take a leadership role in environmental stewardship can do so through their approach to reporting. By assessing, measuring, and controlling environmental impacts, and reporting on the results of those efforts, companies are able to lead in this effort by their own example.

About the authors:

Keith Winn is vice president of marketing and chief operating officer of GreenProfit Solutions Inc., a Ft. Lauderdale based sustainability consulting, certification and contracting firm. You may contact him at 800-358-2901 or kwinn@greenprofitsolutions.com.

Jonathan B. Wilson is a corporate and securities attorney at the Atlanta law firm of Taylor English Duma LLP. Mr. Wilson is also the founding chair of the Renewable Energy Committee of the American Bar Association’s Public Utility Section. You may contact him at 678-336-7185 or jwilson@taylorenglish.com.

Sustainability Accounting

Climate Change has and is continuing to bring about substantial changes in how all business is operated and how it’s impacts are reported. Beyond altruism and transparency, international and national legislation and regulations to cap and reduce the emissions of GreenHouse Gases will play an ever increasing role within the emerging field of Sustainability Accounting.

What does this mean for professional accountants? A large opportunity. Accountants and accounting firms which take the time and the effort to become educated in this still evolving field, will also be positioning themselves as sustainability leaders and opening up new branding and marketing opportunities.

In order to fully understand the implications of Sustainability Accounting and the opportunities it presents, it is important to understand some of the more recent history of the environmental movement and how various regulatory issues have evolved worldwide. This article will discuss current and proposed legislation and new requirements for auditing and reporting plus techniques for the integration of sustainability into 'mainstream' reporting, both to management and external stakeholders. Specific focus will also be addressed for public companies, companies doing business outside the US, and governmental entities.

What is it?

In it’s broadest sense, Sustainability Accounting, is an environmental footprint measurement and reporting system for any business, Non-governmental organization (NGO), charitable or government organization. It is important to state that Sustainability Accounting here in the U.S., is today, with a few exceptions, mostly performed on a voluntary basis. It is based upon the theory that organizations are responsible for more than just financial profit and loss, but also the organization’s overall effect upon the environment, specific interest groups, stakeholders and communities. Organizations such as the Global Reporting Initiative (GRI) and the Prince’s Accounting for Sustainability Project are currently developing valuation methodology to take into account community indicators, human rights indicators, and content and materiality.

Using a more narrow definition, Sustainability Accounting is utilized to measure and report an organization’s impact, in units (tons) of greenhouse gas (GHG) emissions in compliance with various carbon trading systems and regulations. Accounting methods employed for this purpose are compatible with internationally accepted GHG measurement and reporting plans (schemes).

Accounting for Climate Change
Officially, the concept of required sustainability accounting began with the adoption of the Kyoto Protocol: a treaty to the United Nations Framework Convention on Climate Change (UNFCCC) aimed at fighting global warming. It was initially adopted in December 1997, and entered in force in February 2005, with 187 countries signing and ratifying the protocol. Under the protocol, 37 industrialized nations (known as Annex I countries) committed to a 5.2% reduction from 1990 levels in Greenhouse Gas (carbon dioxide, methane, nitrous oxide, sulfur hexafluoride) and two other groups of gas emissions (hydrofluorocarbons and perfluorocarbons) , with the remaining countries giving general commitments. The United States, a party to the UNFCC, did not sign nor ratify, although it is responsible for over 36% of 1990 emissions of all Annex I countries. However, American companies doing business in those countries which are parties to the Protocol are required to be in full compliance.

The Intergovernmental Panel on Climate Change, formed in 1988, is the leading body for the assessment of climate change, established by the United Nations Environment Programme (UNEP) and the World Meteorological Organization (WMO) to provide the world with a clear scientific view on the current state of climate change and its potential environmental and socio-economic consequences. In 1995, the IPCC issued it’s second assessment report which included providing values for global warming potential. These were the first units of measurement for converting various greenhouse gas emissions into comparable CO2 equivalents – the start and basis of this new emissions reporting, which is required under the Kyoto Protocol. For the first time in history, emissions could now be valued, inventoried, and traded, utilizing cap and trade strategies through financial exchanges. Each country is responsible to create a national authority to manage its greenhouse gas inventory and with it, provide accurate reports to the governing protocol authority.

The GHG Protocol Initiative was organized by the World Resources Institute (an environmental think-tank that goes beyond research to find practical ways to protect the earth and improve people’s lives) & World Business Council for Sustainable Development (a coalition of 200 international companies)in order to create a general accounting framework for inventorying and reporting of emissions. The GHG Protocol further categorizes these direct and indirect emissions into three broad scopes:

• Scope 1: All direct GHG emissions.
• Scope 2: Indirect GHG emissions from consumption of purchased electricity, heat or steam.
• Scope 3: Other indirect emissions, such as the extraction and production of purchased materials and fuels, transport-related activities in vehicles not owned or controlled by the reporting entity, electricity-related activities (e.g. T&D losses) not covered in Scope 2, outsourced activities, waste disposal, etc.
Accounting and Reporting Principles

The GHG Protocol Corporate Standard 2004, which is currently used by hundreds of organizations including auto manufacturers, cement companies, consumer goods manufacturers and dozens of other industries, provides the accounting and reporting principles that underpin and guide GHG accounting and reporting for scopes 1, 2 and 3 emissions. The five accounting and reporting principles described in the table below are further elaborated in the GHG Protocol Corporate Standard.

Relevance: Ensure the GHG inventory appropriately reflects the GHG emissions of the company and serves the decision-making needs of users – both internal and external to the company.

Completeness: Account for and report on all GHG emission sources and activities within the chosen inventory boundary. Disclose and justify any specific exclusions.

Consistency: Use consistent methodologies to allow for meaningful comparisons of emissions over time. Transparently document any changes to the data, inventory boundary, methods, or any other relevant factors in the time series.

Transparency: Address all relevant issues in a factual and coherent manner, based on a clear audit trail. Disclose any relevant assumptions and make appropriate references to the accounting and calculation methodologies and data sources used.

Accuracy: Ensure that the quantification of GHG emissions is systematically neither over nor under actual emissions, as far as can be judged, and that uncertainties are reduced as far as practicable. Achieve sufficient accuracy to enable users to make decisions with reasonable assurance as to the integrity of the reported information.

On the Home Field

Although the U.S. is not part of the Kyoto Protocol, there have been significant regulations, guidance and even Executive Orders issued by two US Presidents as a means to begin tracking and reducing our country’s emissions. Various states have for years, required reporting from their largest emitters. This past November, the EPA published a list of 10,000 facilities of large emitting entities which are now required to publicly report or potentially be subjected to fines. With pressure from various large investment groups, the SEC published new “guidance” for 10-K and 10-Q reporters on disclosure of risks due to climate change. President Obama signed Executive Order 13514 essentially activating Executive Order 13423 (President Bush 2007) on establishing GHG reduction goals and strategies for all federal agencies. In the senate, the Kerry-Lieberman Bill proposes the start of a cap and trade system wherein large emitters are penalized, and low emitters are rewarded.

On the corporate side, large companies such as Walmart, have analyzed their GHG impacts, and have not only begun reduction initiatives, but have also started to encourage and soon perhaps, require their 160,000 suppliers worldwide to also reduce their GHG emissions through their ambitious Sustainability Index project. In response to pending and current legislation, as well as initiatives such as Walmart’s, many of the Fortune 500 companies have hired or appointed those with backgrounds in both environmental matters and accounting as Chief Sustainability Officers to manage and oversee their GHG initiatives.

The trickle-down effect to mid-size companies, NGO’s, and other organizations is accelerating. Perhaps fueled by the Gulf Oil leak, interest in the environment is again peaking and many companies are seeking to effectively position themselves as leaders in sustainability. As the Enron scandal provided the impetus for Sarbanes-Oxley, and the Banking collapse of 2008 has fostered in the consideration of a triple bottom line (people, planet and profit) business philosophy, it appears that the concept and establishment of more sustainable business practices combined with consistent reporting is on firm ground.

With an ever increasing consumer and regulatory demand for transparency, organizations of all sizes in virtually every industry will soon need professional sustainability reporting and validation services from a “Green Accountant”.


Keith Winn is vice president of marketing and chief operating officer of GreenProfit Solutions Inc., a Ft. Lauderdale based sustainability consulting, certification and contracting firm. You may visit their website at www.greenprofitsolutions.com or contact him directly at 800-358-2901 or kwinn@greenprofitsolutions.com.