Hope for the Many

Feel as if you are the only person working for the benefit of the planet or community? It's ok. You're not alone. This past weekend, I found some time to get a bit of reading done. Part of it was incredibly depressing (though immensely informative) - Silent Spring by Rachel Carson.

If you haven't had an opportunity to read this book, please do. Considered by many to be the impetus for the modern environmental movement, it blasted apart perceptions on the use of insecticides, pesticides, and other chemical forms of "shaping" Nature to our preferred design. The sad part is that very little has changed today, 50 years later. What happens from now on is partially up to you.

That, as I mentioned, was only part of my reading. Other materials were focused on societal and environmental solutions, some on the horizon, some even being implemented as we speak. At universities, among non-profits, in businesses, even in certain governments, great ideas are being shared. Unique approaches going far beyond lightbulbs and recycling change how we will look at efficiency, society, and going green.

So in a world perpetuating the idea of doom and gloom, know there are others like you, who want to make things better. Please don't get discouraged, and contact me if you are looking to connect with, well, whomever your ideas require.

Take Account of Your Efforts

Yesterday, while in a meeting with a financial advisor, a thought came to mind: "When dealing with cash, future outlay, retirement savings, and other issues, we develop a detailed plan, with visible steps along the way. But is that often done when implementing a sustainability program?"

Perhaps due to how it has evolved, "green", or as we like to approach it, "sustainability" (Green is normally just environmental, while sustainability considers a societal and financial aspect as well), is often seen as a side-project. It's something supported by a number of employees or volunteers, but usually stays on the outside.

Would you structure your 401(k)s or customer relations programs as, "a nice addition"?

No way! They are essential to your personal and professional well-being. Well, so is your sustainability program.

Think about it: What are the goals of "going green"? Sure, reducing your environmental footprint, educating others within and outside the company, and being better community stewards are all good results. But the goals are different. You're aiming to measurably reduce expenses, improve your marketing image, and decrease risk by having a comprehensive plan for any potential issues.

All members of our Approved Green Business Program (soon to be members of our Greater Good Alliance, but more about that later) receive a Sustainability Plan in which to implement within their own business. Separated into three phases - Planning, Action, Marketing, it allows a company to make their time count when implementing their environmental policies. Each item within has a timeframe to seek its completion, so they can stay on track.

Some examples:
Phase I:

• Build a Green Team
• Audit existing stock
• Collect utility bills

Phase II:

• Assess supply chain (Purchasing & Production)
• Employee habits

Phase III:

• Press releases
• Company dispatch
• Ongoing consultation

So, next time you look to make your business more sustainable, be sure to have a plan! Questions and comments can be directed to Joseph Winn at GreenProfit Solutions.

We're Back!

Wow. Looking at the history, and it has been a year and a half since the last update!

During that time, we have evolved significantly as a company, and, modified slightly how we approach the online media outlets. As you may know, we have an active Twitter feed @greenprofitsol as well as a Facebook Page - you're encouraged to follow and Like us today!

Much of our communication has been directed through these outlets, given the propensity of the online public to be focused on quick posts, short stories, and "catchy" statements in under 140 characters. However, we recognize that there is also a large population eager to read full blog posts, and who are we to disappoint!

Our blog will return, but in a slightly different form. First, most previous posts were articles we had posted elsewhere on our network. Now that our primary website is fully capable of hosting these stories, we will be forgoing the duplicity. This blog will take on a more laid-back attitude.

This is where company executives will be able to talk about what is on their mind, reactions to stories in the news (not just links to the articles), and suggestions on how you can help make your business, non-profit, home, or community more sustainable.

Importantly, this blog may contain opinions expressed by posters that are not those of GreenProfit Solutions or its partner companies.

All of us are looking forward to this new avenue of communication!

So, now that we're back: What should we discuss?

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.

What You Can't See...

The Deepwater Horizon sinking and subsequent Gulf oil leak. A terrible tragedy, resulting in the loss of 11 lives. British Petroleum estimates that 5,000 gallons of oil is leaking into the Gulf of Mexico daily. However, independent scientists, viewing video and remote sensing data of the leak, estimate there could be nearly 20 times that leaking out each day. No matter what value is believed, most agree it is in dire need of being stopped.

So who is at fault? Transocean, owner of the Deepwater Horizon rig? BP, manager of the operation? Or could it be Halliburton, the company overseeing a cement-laying process just prior to the explosion?

Blame will be decided after armies of attorneys have their days, weeks, months and most likely, years in the court. Meanwhile, people are angry and frustrated: Miles of sludge on the coastal water, satellite images of huge brown areas of the Gulf, tarballs on the beaches, fishing fleets stuck in port, and those indelible images of marine life covered in the blackish brown ooze. The combination of economic, environmental, and social impacts cause a widespread concern by otherwise complacent people.

It’s images like these that fuel some of the latest “bursts” of environmental activism. Back in the 1960’s, highly public environmental disasters such as the Cayuhoga River fire in 1969 (actually the sixth on the river, caused by combustion of dissolved chemical loads) and daily smog in major cities, drove the populace to demand change, eventually producing historic legislation still in use today, including the Clean Air and Clean Water Acts and the National Environmental Policy Act (NEPA).

Oil leaks and the immediate damage they cause are easy to see, and most of us do not care who is at fault, just clean it up and make it go away. Billions will eventually be paid out by the above companies (and perhaps others as yet unnamed) in efforts to clean up, mediate, and compensate damages incurred. Thousands, perhaps, even hundreds of thousands of individuals, people like you and me, will be involved in actions in attempts to restore this body of water and all of its natural treasures.

Today, all eyes are on the Gulf, but what about the issues of Climate Change? Certainly, whether the public believes humans are contributing to climate change or not, most understand that greenhouse gases have the potential to cause damage on a planetary scale. Whole populations of both people and animal life can (and are) lose their lands and drinking water. Invasive pests, normally killed off by cold winters, are living through now milder climates and wreaking environmental and economic damage on huge areas of virgin forests. Coral reefs, the rain forests of the sea, are in a serious state of decline. So why is there little public outcry about this?

Imagery and emotion. There’s no sinister blackish sludge, and the now-overused photos of a polar bear on a small ice flow, or villagers in some faraway country pointing to a dry lake bed carry little feeling. Climate change is caused by a build-up of invisible gases, primarily CO2. You can’t see the threat: no immediate business interruption, no oil covered birds, nor can most people understand why CO2 would even be a problem. After all, we were all taught in school, that people exhale CO2, and trees utilize that CO2 to create Oxygen (O2). Plus, it’s a completely natural gas. Of course, this is not to mention society’s confusion. Our company performed an unofficial study amongst a sample group and over 40% stated that greenhouse gases were causing the breakdown of the earth’s ozone layer. So education is another hurdle.

We should all be angry about the situation in the Gulf and should press our political leaders to take actions, not only to ensure the rehabilitation of affected areas and compensate those directly impacted, but also to take steps to minimize the risk of this ever occurring again. Simultaneously, with the global eye, can a national (and international) focus on our planet’s health, similar to the environmental push and resultant legislation of the 1970’s, again be brought to the forefront, igniting change and introducing solutions to a system bogged down in political and economic quagmires?

History has taught us that, unlike the expression, what we can’t see CAN hurt us. Perhaps, in the vein of events from the 1960’s, this terrible tragedy will leave a legacy of positive change for our planet.

Joseph Winn is the President of GreenProfit Solutions, Inc. a sustainability consulting, certifying and contracting firm. For more information, please contact Joseph at 1-800-358-2901 or email jwinn@greenprofitsolutions.com.

New SEC Guidance on Climate Change Risk Disclosure – Part 2

In our last article, we spent some time on the steps and actions leading up to the new SEC Climate Change Risk Disclosure guidance (hereinafter, the “Guidance”). In this article, we will examine the details and requirements of the new SEC guidance. In a following article we will discuss the potential benefits of a certification program, and also measure the relevance this action has on non-public companies.

What the Climate Change Guidance Really Means

The most important thing to realize about the Guidance is that it is not law, it is merely guidance. The requirements of public company disclosures, as set out in the Securities and Exchange Act of 1934 (the “1934 Act”) and Regulation S-K have not changed. The Guidance merely provides some gloss on how the SEC might interpret a disclosure issue if one arose. In addition, to the extent SEC staff provides comments on a public issuer’s financial report discloses, SEC staff are likely to refer to the Guidance when commenting.

The 1934 Act requires quarterly and annual financial reports (with quarterly reports on Form 10-Q and annual reports on Form 10-K) for companies with registered securities (defined in the regulations as “registrants”). The public disclosure requirements of the 1934 Act apply to all publicly-traded companies (i.e., those whose shares are traded on public exchanges like the NYSE and the NASDAQ) and those few companies who have so many shareholders that the public reporting requirements apply to them.

Attorneys, accountants and business people accustomed to working on financial reports under the 1934 Act are familiar with the touchstone of disclosure in those reports: the company must disclose those material elements of its business that a reasonable investor would consider to be material. Nearly all of the other regulations and guidance concerning financial reports spring from this basic principle. Information is considered “material” for disclosure purposes if there is a substantial likelihood that a reasonable investor would consider it relevant in deciding how to vote or make an investment decision.

Item 101 of Regulation S-K requires that the registrant disclose the material effects of compliance with any laws that might apply to the registrant. The Guidance states what should be obvious, that Item 101 “requires disclosure of the material effects that compliance with environmental laws may have on capital expenditures, earnings or the competitive position of a company”.

So, by way of example, if a registrant operates facilities with significant air or water emissions, the registrant should disclose in its financial reports its cost of complying with the Clean Air Act, the Clean Water Act and other environmental laws and the potential financial impacts of non-compliance. In contrast, a public company with no material air or water emissions would not have a duty to disclose its hypothetical liability where there is not reasonable likelihood of that liability coming to pass.

With respect to climate change, the general rule of disclosure under Item 101 means that the registrant must also disclose its actual costs of legal compliance and the potential costs of non-compliance. For example, if legislation imposed a system of emissions cap and trade, companies whose emissions exceed the stated caps, will be forced to buy “credits” and perhaps pay fines. Conversely, companies with emissions under a stated level, will be able to “sell” their credits and potentially improve their financial position. In addition, countries around the globe have and are continuing to assess fines to companies they believe are inflicting environmental damage to their nations.

Importantly, a registrant is not required (and is, in fact, prohibited) from making disclosures that are speculative. Unless and until emissions cap and trade legislation becomes law, a disclosure about the potential benefits of a cap and trade system would generally be ill-advised. In the same way that the benefits of prospective legislation are too speculative to disclose, the cost and expense of potential future legislation would also be too speculative to disclose.
Public reporting companies disclose in their quarterly reports on Form 10-Q and their annual reports on Form 10-K pending legal proceedings. Item 103 of Regulation S-K contains specific requirements about the extent to which particular items of litigation must be disclosed. Again, in general, materiality is the touchstone of disclosure.

The Guidance states that litigation disclosures under Item 103 must include any environmental enforcement actions and orders material to the registrant. As the Guidance notes, there already have been enforcement actions (notably in the State of New York) with respect to the accuracy of environmental disclosures in financial reports. There are also several lawsuits pending in which private litigants have sued companies over alleged climate change resulting from the emissions of those companies. Public companies who are defendants to such suits would be required to disclose them, applying the same materiality standards applied to any other kind of litigation.

If national climate change legislation, including a cap and trade system, became law, disclosures of potential or hypothetical litigation might be appropriate under Item 103. Until such potential legislation becomes law, however, disclosures of hypothetical or potential contingencies under Item 103 are premature. Disclosures must include “such further material information, if any, as may be necessary to make the required statements, in light of the circumstances under which they are made, not misleading.” See 17 CFR 230.408 and 17 CFR 240.12b-20.

In quarterly and annual reports, public issuers provide a discussion of the issuer’s financial results and future prospects called “Management’s Discussion and Analysis” (or “MD&A”). Item 303 of Regulation S-K requires an issuer “to disclose known trends, events, obligations or uncertainties that will, or are reasonably likely to, materially affect the company’s liquidity, capital, resources or operations”. In addition, companies are also required to disclose any other information the company believes is necessary to an understanding of its financial conditions, changes in financial condition and results of operations.

Discussing “known trends, events, obligations or uncertainties” is a potential bottomless pit. While management will be aware of immediate and obvious trends (such as increasing or decreasing sales, or increasing or decreasing costs of goods sold) there is an infinite list of potential contingencies that might impact the issuer’s financial performance. In the MD&A, however, the issuer is not required to identify every possible contingency, but rather only those “known trends, events, obligations or uncertainties” that are “material” to a reasonable investor’s decision to invest or vote securities.

Item 503(c) of Regulation S-K helps issuers draw the line between “known trends” and mere speculation by providing that the issuer must disclose "the most significant factors that make the offering speculative or risky" (emphasis added).

By way of example, an actual lawsuit that is pending is more significant than a threatened lawsuit that has not been filed. A threatened lawsuit is more significant than the risk of a possible future lawsuit that has not yet been threatened.

Put into this context, the disclosure of climate change impacts should be ranked against the issuers other known trends and contingencies. If the issuer reasonably believes that certain environmental or climate change impacts are more significant than other contingencies, that belief should guide its disclosure.

By way of example, if an issuer had facilities in low-lying coastal areas that might be threatened by an increase in sea level brought about by an increase in global temperatures, that might be a contingency with the potential to impact the issuer’s financial statements. Whether that risk is one that should be disclosed in a financial report, however, will depend on the relative immediacy and potential impact of that risk in comparison to other risks that the issuer faces. Ultimately, while the Guidance discusses these types of disclosures and provides some color on how issuers should consider them the Guidance does not change the law regarding disclosures and does not necessarily require issuers to disclose new or different kinds of risks.

The practical impact of the Guidance, however, is to raise the awareness of public issuers regarding environmental and climate change risks and costs. In light of the Guidance, public issuers should not reasonably be able to claim surprise if future enforcement actions challenge the adequacy of disclosures of these kinds of risks.
Because the disclosure of contingencies, however, requires a weighing of immediacy and impact against other potential risks, a well-advised issuer will adopt a consistent theoretical construct for considering and weighing the immediacy and impact of risks for disclosure purposes. Part of that theoretical construct, many issuers may conclude, is a process for assessing and measuring the potential impact of environmental and climate change risk. It is to this end that we will address some practical steps issuers may take to perhaps mitigate their environmental and climate change risks in Part 3 of this article series.

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.