Monday, September 24, 2007

Disclosing Climate Change

The California Public Employees' Retirement System, asset managers, and environmental groups filed a petition with the Securities and Exchange Commission (SEC) on September 18, 2007, asking the agency to issue interpretive guidance that addresses how climate change and related risks must be incorporated in corporate disclosures under existing law. The group says the risks many corporations face regarding climate change are material to shareholder investment decisions.

This is a very interesting notion, and one that I haven't encountered, or, for that matter, ever even thought of.

An entity's financial statements are supposed to disclose various contingencies, as required by Statement of Financial Accounting Standards, No. 5, Accounting for Contingencies. Other accounting standards require disclosing various risks faced by the entity. For example, an entity should disclose the existence of customer's that comprise more than 10% of revenue. The thinking - the reader of the financial statement should be aware of that and the risks associated with it. Say a business has one customer that comprises 69% of revenues. The entity would likely be in trouble if it lost that customer.

Same thing goes for economic risks. Assume the entity is a bar that is located right across the street from a factory. If the factory goes, the bar probably does too. The reader of the financial statements would want to know that.

Which is why I am intrigued by this petition. Assume you are reading the financial statements of an entity that is located right on the water. Because of global warming, the entity might literally be under water in 10 years. I think that is something that the reader of the financial statements would want to know.

This is an interesting topic and one I am going to try to continue to follow.

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