Supply Chain Risks and Climate Change

By Patricia Van Arnum - DCAT Editorial Director

November 29, 2017

The recent hurricanes in the US, including Puerto Rico, have underscored the role of climate and weather-related issues in supply chains. What is the impact on climate-related issues on the supply chain, and what do companies need to consider for material impact?

Disruptions to global supply chains, such as those caused by natural disasters, can hurt economic growth and productivity. These events may pose risks to private-sector companies by, for example, disrupting supply chains. Under federal securities laws, certain companies are required to disclose specified information in annual filings with the US Securities and Exchange Commission (SEC), and the SEC issued guidance in 2010 to assist companies in satisfying these disclosure requirements as they apply to climate-change matters. DCAT Value Chain Insights (VCI) examines how companies fared.

Setting the stage
The SEC issued guidance in 2010 to provide information to companies on how existing disclosure requirements apply to climate-change matters. The 2010 guidance describes some climate-related impacts that companies may face, including risks to their supply chains, and under what circumstances these impacts could trigger disclosure requirements. Companies may disclose climate-related supply chain risks under four broad categories of climate-related topics that the SEC identified in its 2010 guidance. These categories are (1) impacts of legislation and regulation related to climate change; (2) impact of international accords; (3) indirect consequences of regulation or business trends, such as decreased demand for goods that produce significant greenhouse gas emissions; and (4) physical impacts, such as changes in water availability. In addition to the SEC disclosure, companies may disclose climate-related risks through other channels, such as nongovernmental organizations, company websites, and foreign entities.

A 2016 report by the US Government Accountability Office (GAO) examined these disclosure requirements. It looked at the following: (1) the types of climate-related supply chain risks companies are disclosing in their SEC filings and other channels through which companies may disclose climate-related supply-chain risks; (2) how SEC considers climate-related supply chain risks when monitoring and enforcing compliance with disclosure requirements; and (3) what actions, if any, the SEC has taken to identify climate-related supply-chain risk information that investors may need. For the study, theGAO conducted a review and audit from March 2015 to January 2016 on 973 company filings.

Examples of climate-change risks
Table I outlines categories of climate-change risks identified by the SEC and examples of how they could trigger disclosure rules. 

Table I: Categories of Climate Change Risks Identified by the Securities and Exchange Commission (SEC) and Examples of How They Could Trigger Disclosure Rules
Category of climate-change risk Definition Examples
Legislation and regulation Pending or existing regulations or legislation related to climate change at all levels of government Companies could face costs from improving facilities and equipment to reduce emissions in order to comply with regulatory limits. They could also face costs to purchase, or profit from the sale of, allowances or credits under a "cap and trade" system.
International accords Treaties or international accords relating to climate change The European Union Emissions Trading System could have a material impact on a company's business, which could potentially be the same as the impact from US climate change legislation and regulation.
Indirect consequences of regulation or business trends New opportunities or risks created by legal, technological, political, or scientific developments related to climate change. Companies may face decreased demand for goods that produce significant greenhouse gas emissions. They may also face reputational risk, with potential adverse consequences to business operations or financial condition, from the public's perception of publicly available data relating to their greenhouse gas emissions.
Physical impacts Significant physical effects of climate change that could affect a company's operations and financial results. Physical effects could include effects on severity of storms, sea levels, and water availability. Severe weather could cause property damage and disruptions to operations for companies with operations concentrated on coastlines. It could also cause indirect financial and operational impacts from disrupting the operations of major customers or suppliers.

Source: US Government Accountability Office, "Supply Chain Risks: SEC's Plans to Determine If Additional Action Is Needed on Climate-Related Disclosure Have Evolved," (Washington, DC. January 2016).

 

Review process and future considerations
As part of its review process, the SEC considers climate-related supply chain risks as it considers the totality of information that companies are required to disclose in its routine monitoring processes, and it may consider allegations of inadequate or fraudulent disclosures as part of its enforcement process.The SEC, through its Division of Corporation Finance, seeks to ensure that companies provide required information in order for investors to make informed investment decisions. According to SEC documents, during the Division of Corporation Finance's review, the staff check to see if companies are meeting their disclosure requirements and seeks to enhance companies' compliance with disclosure requirements.

To accomplish this, the Division of Corporation Finance conducts the following three main types of reviews:

Initial reviews. A company's initial registration statement is reviewed to evaluate compliance with applicable disclosure and accounting requirements.

Periodic filing reviews. In addition to the initial review, according to the SEC staff, each reporting company's financial statements are examined at least once every three years and many companies are reviewed more frequently; many companies' nonfinancial disclosures are also reviewed.

Selective reviews. Transactional filings, such as documents that companies file with the SEC when they engage in public offerings and other actions, are selectively reviewed at the discretion of the Division of Corporation Finance. The Division of Corporation Finance performs these reviews through offices that focus on specific industries. According to the SEC staff, reviewers spend many years reviewing the same industries and, as a result, develop industry-specific expertise with regard to expected disclosure items in a particular industry, including climate-related disclosure. A review team from the appropriate industry office is assigned to each filing that is selected for review. At times, an engineer may be involved in a review.

The GAO report notes that some stakeholder groups interested in climate-related disclosure issues have requested that the SEC take additional actions to increase climate-related information disclosed in companies' filings. The GAO report says that the SEC has no plans to specifically determine if additional actions related to disclosure of climate-related risks are necessary or appropriate in the public interest or for the protection of investors, but that other potential and ongoing efforts by the agency could address climate-change disclosure.

Specifically, the Office of the Investor Advocate is tasked with proposing to the SEC, to the extent practicable, changes to its regulations or orders that may be appropriate to mitigate identified problems and promote the interests of investors, among other things. According to the Investor Advocate, climate-related risk disclosure is an issue that his office, including its Ombudsman could consider reviewing, though it has no formal plans to do so. Additionally, the SEC's disclosure effectiveness project, which began in December 2013, could address the subject of climate-related disclosure. The SEC is reviewing the current disclosure requirements to evaluate whether it might refine them to more effectively provide investors with the information they need to make informed decisions. For example, if the SEC identified gaps in disclosure or opportunities to increase the transparency of information, the SEC could potentially recommend new disclosure requirements. As of October 2015, the project is in its initial phase focusing on business and financial disclosure requirements, and the SEC staff have not recommended changes to the SEC. Although the disclosure effectiveness project is broad and does not specifically focus on climate-related disclosure, or the 2010 guidance, the project provides investors, companies, and other stakeholders with opportunities to provide comments to the SEC on any disclosure topic, including disclosure of climate-related risks to supply chains.