SEC on the weather!

Up until now the climate change debate may have impacted your politics or your travel plans but it may soon impact the regulatory disclosures you business makes. It's already happening in USA. Last week the Securities and Exchange Commission (SEC) issued interpretive guidance on disclosures regarding the financial impact of climate change on businesses. So whether it's an impact of legislation or regulation or international accords regarding climate change or it is indirect consequences or a direct physical impact, companies regulated by the SEC now need to come clean about green consequences.

Jeffrey Smith, the Head of the Environmental Practice at well-known American law firm, Cravath, Swaine & Moore expresses hi view on how climate change norms would work. Jeffrey has testified before a Senate sub-committee on the potential SEC disclosure requirements regarding the financial consequences of global climate change so he has intimate knowledge of the how and why this new norm.

Here's a verbatim transcript of the interview on CNBC-TV18. Also watch the accompanying video

Q: How is this going to work because many of the climate change regulations or accords have yet to be finalised so how do you quantify the impact without knowing the final terms?

A: We just exited an era where the disclosure requirements actually were going voluntary and private and what the SEC has done here is to say let's take control of these things and make them public. However, since there are very few regulations in the US that are quantifiable there is going to be a great deal of speculation and a great deal thought by a lot of companies about what the indirect implications for these regulations are and what they are going to say is.

Q: Could that lead to a sense of exaggerated fears within the analysts, investor community on the impact of climate change. Let me read to you a portion of SEC release which says that, 'Legal, technological, political and scientific developments regarding climate change may create new opportunities or risks for companies.

For instance, a company may face decreased demand for goods that produce significant greenhouse gas emission or increased demand for goods that result in lower emissions than competing products. As such, a company should consider, for disclosure purposes, the actual or potential indirect consequences it may face due to climate change related regulatory or business trends.' Now the fear is that this is going to be a tough to quantify and hence could create exaggerated fears amongst investors, analysts etc. What do you think?

A: I think that's certainly true. If the disclosure is imperfect and premature then there will be those sorts of risks and that will ripple through the business community. But one of the interesting things is the SEC has couched this action as interpretive guidance i.e. they have taken the view that disclosure regulation always require this sort of an analysis. So, the real effect is going to be that the companies are going to have to take a rigorous look at climate change related impacts in the same way they take a look at other things related to their business. In other words, it brings climate change into the main stream of other topics that are analyzed by businesses in preparing a disclosure. So if they do a good job and if they apply the materiality thresholds which are applicable here as everywhere else, then hopefully, the risk of a premature disclosure would minimise and the inaccurate disclosure would be eliminated.

Q: Does this apply only to American companies or because it is SEC guidance that applies to all companies that have anything to do with the American markets for instance a bunch of Indian companies have American depository receipts (ADR) listed on the American markets, will they also come under the purview or the ambit of this new guidance?

A: Anybody who files 20-F statement is explicitly under the ambit of this guidance so is it's principally for American companies, then I think the ones that will be effected most dramatically are US based multinationals that have operations in other climates where the regulatory scene is much more advance than it is in the United States and therefore where the quantification that you spoke about earlier is possible. But if you are a foreign issuer in the United States and do a 20-F then you are subject to these requirements as well.

Q: What are you advising your clients, the companies that come to you for advice on how to deal with this new guidance, how to quantify some of these things or what the impact of this could be, how to communicate these with the investor community or the analyst community?

A: I think there are two main pieces of advice now as this gets digested and works its way through the system. First of all, the SEC was explicit in recognising that a lot of disclosure had taken place over the course of last four-five years but not in SEC mediums in things like the Carbon Disclosure Project and also the Global Reporting Initiative (GRI).

So there is a lot of information floating around in the market place which is not subject to any regulation at all. So rule one is, take if you are a company that is disclosing to your investors through those mediums for a sustainability reports or other voluntary mechanisms; take those disclosures and apply to them the same regulations that you would apply to your SEC disclosure that is put them side by side with your SEC disclosure.

The second thing is that because this interpretive release takes new phenomena on climate change and makes it subject to all the regulations do same source of analysis for climate change for this as you would for almost any other business consequence that effects your operations in your financial facts.