By Soyoung Ho
An asset manager petitioned the SEC to write a rule requiring public companies to identify the specific locations of their assets so investors and analysts can better assess the physical risks companies face with climate change.
In particular, the asset manager, Impax Asset Management LLC, asked for a requirement to list at least street addresses and preferably longitude and latitude of all facilities whose loss or impairment would affect financial results materially.
The rulemaking petition comes as research has shown that extreme weather patterns and spread of tropical diseases and pests to temperate zones are linked to global warming.
“These changes pose risks not only to companies, but their investors, financial markets and the global economy,” Impax President Johseph Keefe and Julie Gorte, the firm’s Senior Vice President for Sustainable Investing, wrote on June 10, 2020. The SEC posted the letter publicly on July 9.
They noted that climate change poses several types of risk. Transition risks, including regulatory, litigation, and reputational risks, would affect more on the largest emitters of carbon dioxide emissions, which cause global warming.
But physical impacts can happen to any company and do not depend on emissions, but where the company operates and where the major facilities are in its value chain, Impax said.
“This is why investors need more precise physical location data from companies than most now provide,” Keefe and Gorte wrote.
The petition includes a table with citations of several reviews and papers of the value at risk because of climate change.
They said CDP, a nonprofit organization that runs a global environmental impact disclosure system, recently reported that 215 of the world’s largest companies think almost $1 trillion in value are at risk from climate change within the next five years. More than 70 percent of the companies said the physical impact of climate change posed risks to company operations, and an additional 20 percent said that physical impacts posed supply chain risks.
Moreover, Standard & Poor’s recently estimated that 60 percent of S&P 500 Index companies’ physical assets face high risk of at least one kind of climate-related physical losses, a total market capitalization of $18 trillion in the United States.
“While the extent of effectiveness of the global response to climate change remain uncertain, one thing is very clear: companies and investors must prepare for a range of possible outcomes with diverging transition and physical risks,” S&P noted.
Impax’s letter also noted the Financial Stability Board’s (FSB) Task Force on Climate-related Financial Disclosures (TCFD) which provided a framework for companies to develop more effective climate-related financial disclosures, including a scenario analysis.
“Analysis such as that recommended by the TCFD is hobbled when it comes to physical risk by inadequate disclosure of the location of companies’ key assets,” the petition stated.
For example, a company with a manufacturing facility in a flat coastal location is more vulnerable to cyclones and rise in sea levels than a facility located hundreds of feet above sea level. But Keefe and Gorte noted that some companies only identify the location of their headquarters. In their view, the location of facilities within states or countries is more relevant to assess physical risk.
They said that it is impossible to know the precise location of the next hurricane or drought, but it is possible to identify areas that are more or less vulnerable to various types of risks. And understanding the changing probabilities of future events is potentially valuable to investors and also to companies as they make decisions about facility sites.
The letter cited the bankruptcy filing last year by Pacific Gas and Electric Co. (PG&E) because of wildfires in Northern California in 2017 and 2018 as an example of vulnerabilities.
Impax said the 2010 commission guidance in Release No. 33-9106, Commission Guidance Regarding Disclosure Related to Climate Change, was useful. The interpretive guidance asks companies to disclose material information related to climate change. The guidance says companies should inform investors about the risks they face from climate change, including lawsuits, business problems, regulatory supervision, or international treaties.
Material risks, such as climate risk, are already required to be disclosed under Regulation S-K, Impax said. But the rule does not require information on the specific location of major facilities.
“Without this information, investors will be vulnerable to an increasingly frequent and severe set of shocks that might be mitigated or avoided with increased disclosure,” they wrote.
This article originally appeared in the July 15, 2020 edition of Accounting & Compliance Alert, available on Checkpoint.
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