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INTRODUCTION

The hype surrounding the recent Copenhagen Conference coupled with the contemporary debate on global warminghas highlighted the crucial importance of the climate change issue in the twenty-first century. While India was non-committal towards any legally binding emission cuts at Copenhagen, it seems that certain initiatives are being takenback home on this front. One of the initiatives in the pipeline is that of the Union Ministry of Corporate Affairs(MCA) to make corporate disclosures of green initiatives mandatory in order to sensitise companies about mitigationof climate change. 1

It would be pertinent to note that similar to the MCAs proposal, there has been a development, interestingly, in theU.S. securities regulation framework, albeit on a different note. According to an interpretive guidance 2 issued by theU.S. Securities Exchange Commission ( SEC), all listed companies would now have to consider the effects of globalwarming while disclosing business risks to investors during securities filing with the SEC. 3 Apart from the usual reac-tions elicited by different interest groups, what is important to note is that, rather than taking a stand on the climate

change debate, the SEC has issued the guidance with the sole objective of protecting investor interests.4

The underlying philosophy regarding disclosures is that it enables investors to make an informed and intelligentchoice, discourages managerial malpractice, helps reduce suspicion and generates stakeholder confidence. 5 Accord-ing to the Securities and Exchange Board of India ( SEBI), the philosophy of disclosures is based upon the premisethat securities represent a bundle of rights that are not visible to an investor and therefore, knowledge about thecompany and the nature of the bundle of rights is necessary before investing. 6

While listed companies are generally required to disclose material business and financial risks under whichever juris-diction they are subject to, the interpretive guidance by the SEC has opened room for discussion on the materiality ofthe risks posed by climate change to corporations. In India, however, while adequate disclosure norms are in place,corporate information is not very forthcoming on this aspect. Therefore, the recent development in the U.S. warrants

a discussion on whether listed companies in India should mandatorily make disclosures related to risks and opportuni-ties associated with climate change. In order to explore the possibility of having such a disclosure policy in India, itwould be pertinent to understand how the SEC has approached the issue.

APPROACH OF THE SEC TOWARDS CLIMATE CHANGE R ELATED DISCLOSURES

VOLUNTARYDISCLOSURES It would be interesting to note that although disclosure obligations are perceived to be burdensome, yet,

many corporations worldwide are voluntarily making disclosures related to climate change. Such disclosures, made tocertain organisations maintaining useful and informative databases, have significantly increased over the recentpast. 7 Some of these organisations which report such disclosures are:

1) Carbon Disclosure Project (CDP) : A non-profit organisation that contains a database of disclosures relatedto greenhouse gas emissions and climate change strategies adopted by corporations. With disclosures from around2500 entities, it can be safely said that this initiative is by far one of the most successful in this venture. 8

2) Climate Registry: A non-profit collaboration that sets standards to calculate, verify and publicly report green-house gas emissions of governments and corporations in North America. 9

3) Global Reporting Initiative: A non-profit organisation that promotes corporate reporting related to sustainabledevelopment (which would include climate change related disclosures). 10

* Jayant Raghu Ram, Student of VIth Semester, B.B.A. LL.B. (H.), National Law University, Jodhpur* Arjun Pall, Student of VIth Semester, B.A. LL.B. (H.), National Law University, Jodhpur

Corporate Disclosures Related To Climate Change by Jayant Raghu Ram & Arjun Pall*

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INVESTORACTIVISM LEADING TO THE GUIDANCE

The foremost factor that led the SEC to issue the instant guidance was the tremendous pressure brought about byvarious investor interest groups. 11 One of the first instances of such activism was in 2004, when a group of fifteeninstitutional investors with nearly $800 billion assets petitioned the SEC to make listed companies disclose the fi-nancial risks of global warming in their securities filings. Subsequently in 2007, it was testified before a Senate Sub-

Committee, among other things, that corporate information being provided on climate change was not only inade-quate, but was also insufficient to assist investors to make informed investment decisions. 12 It was further arguedthat the prevailing voluntary reporting did not adequately address investor needs and therefore could not be consid-ered a permanent substitute for mandatory reporting. 13

In response, initially the SEC allowed shareholder resolutions to seek information from companies on the financialrisks faced due to environmental issues such as climate change. 14 However, the defining moment came in 2009,when a group of twenty institutional investors filed a supplementary petition to the SEC seeking an interpretiveguidance on the corporate disclosure requirements regarding climate change risks. 15 Finally, the SEC released theinstant interpretive guidance in February, 2010.

NATURE OF THE GUIDANCE Interpretive statements contain the SECs views and interpretation of federal securities laws and SEC regulations. 16

Therefore, the instant guidance does not seek to create any new legal requirements or modify existing ones andmerely intends to provide clarity and enhance the consistency of existing regulatory obligations. 17

SOURCE OF DISCLOSUREOBLIGATIONS The source of obligations for disclosure of non-financial information in the U.S. securities regulations is Regulation S-K (Chapter II of Title 17) of the Code of Federal Regulations. The relevant provisions are explained briefly: 18

1) Description of Business: In general, Item 101 requires a company to describe its business and that of its sub-sidiaries. Specifically, Item 101(c)(1)(xii) requires the disclosure of the material effects that compliance withenvironmental protection laws could have upon the companys capital expenditure, earnings and competitiveposition.

2) Legal Proceedings: Item 103 requires a company to briefly describe any material pending legal proceedings

against it or its subsidiaries. Instruction 5 to this Item specifically requires a brief description of any administrativeor judicial proceeding arising under environment protection laws.

3) Managements Discussion and Analysis: Item 103 requires past and prospective material disclosures that wouldenable investors to assess a companys financial condition and operation results, in the context of managementsdiscussion and analysis. 19 Disclosures which are non-financial in nature would be considered material if they havea probable bearing on the companys finances and operating performance in the future.

4) Risk factors: Item 503(c) requires a company to discuss those significant factors that make investing in the com-pany speculative or risky. Such risk factors should be clearly elucidated and their effect on the company must bespecifically stated.

In addition to the above requirements, Rule 408 and Rule 12b-20 of the General Rules and Regulations promulgatedunder the Securities Act, 1933 and Securities Exchange Act, 1934 respectively, a company must disclose such mate-rial information that may be necessary to make the required statements not misleading in the context in which theyare made.

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DIFFERENTHEADS OF DISCLOSURES

The SEC has identified, 20 as examples, four categories of climate change related disclosures which companiescould probably consider:

1) Impact of Legislation and Regulation: Under this category, companies are required to consider the specificrisks that they could face due to significant developments in the legal framework governing climate change. Themanagement is required to evaluate whether a pending law is reasonably likely 21 to be enacted, and if en-acted, is reasonably likely to have a material impact on the company, its financial condition or operations. Apartfrom evaluating the threats, the company is also required to evaluate the opportunities that it may have if theproposed law were to be enacted.

2) International Accords: As is being currently witnessed, the international community is increasing its efforts toreduce greenhouse gas emissions through various legal instruments. Under this head, a company whose business isreasonably likely to be affected, should monitor the progress of such international legal developments and con-sider their material impact on the companys business.

3) Indirect Consequences of Regulation or Business Trends: Legal, technological, political and scientific devel-opments regarding climate change could create new opportunities or risks for companies, vis--vis , increase ordecrease in the demand for new or existing products or services. 22 Furthermore, a company is required to con-sider whether the public disclosure of its greenhouse gas emissions could damage its reputation and thereby ad-versely affect its business operations or financial condition.

4) Physical Impacts of Climate Change: This category best captures the material impact that climate changecould have on a business. A company whose business is vulnerable to the effects of severe climate change re-lated events, such as rising sea levels and increasing frequencies of hurricanes, should consider disclosing thematerial impact of such events on its operations and results.

SCENARIO IN INDIA

It has been well understood that developing countries such as India would be amongst the worst hit by the adver-sities of climate change, 23 which have been well documented. 24 However, in India, while adequate disclosureobligations are in place, there is no clear disclosure policy for companies to follow in the present context.

LEGALFRAMEWORK FOR SECURITIESDISCLOSURES

As per the extant Indian securities regulations, listed companies are mandated to make disclosures at two stages:

1) Initial Disclosures: Under Regulation 57(1) of the SEBI Issue of Capital and Disclosure of Risks Regulations,2009, an offer document 25 issued by an issuer is required to contain all material disclosures which are true andadequate so as to enable the subscribers to make an informed investment decision.

2) Continuous Disclosures: The provisions regarding continuous disclosures of material risks faced by listed com-panies are contained in the Equity Listing Agreement ( Agreement ):

(i) As per Clause 36 of the Agreement, every company is required to immediately inform the stock exchange ofall events which would have a bearing on the performance and operations of the company as well as price sen-sitive information. Under Clause 36(7) , every company is required to inform the stock exchange of any otherinformation having a bearing on the operation or performance of the company as well as price sensitive infor-mation. Therefore, the blanket nature of this provision necessarily implies the inclusion of information relatingto the direct and indirect effects of climate change on the company.

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Since disclosures are given more importance in securities filings, it is suggested that SEBI fill the present vac-uum by providing a clear disclosure policy by devising specific climate change disclosure requirements both atthe initial and continuous stages of disclosures. 35 This would be in consonance with SEBIs responsibility towardsthe protection of investor interests. An important point that should be considered while framing such manda-tory disclosure requirements is that emphasis should also be laid on the opportunities that climate change couldpresent to Indian companies. This approach would make companies see the bright side of such obligations.

ARGUMENTSAGAINST CLIMATE CHANGE R ELATED DISCLOSURES

INCREASEDCOMPLIANCECOSTS

While disclosures are considered beneficial for investors, they increase costs associated with regulatory compli-ance for companies. 36 Given the various disclosure obligations that a company is already required to comply

with, the increased disclosure requirements would further constrain the companys resources. Furthermore,there is always the attendant possibility that not all investors are going to scrutinise the disclosures, therebyreflecting the opportunity costs of the increased disclosure burden.

IDEOLOGICALOPPOSITION

Though climate change has been widely accepted as happening, there are still a number of critics who refuseto accept the global warming theory and describe the claims of climate change as unsubstantiated. 37 Indeed,the instant guidance is politically hued. It would be interesting to note that the guidance was passed threevotes to two. Thereafter, one of the consistent criticisms against the instant guidance has been that the SECsmove was unwarranted as it amounted to taking a stand on the climate change debate. 38 In response, a privatebill entitled Maintaining Agency Direction on Financial Fraud Bill has been introduced in the U.S. Senate,which attempts to block future moves by the SEC to issue climate change related interpretive guidance and alsoseeks to nullify the instant guidance. 39

CONCLUSION

While it is heartening to see that a certain part of India Inc. is voluntarily disclosing risks related to climatechange, not many companies seem to have jumped onto the bandwagon a fact that appears to be discourag-ing. Given that India, as a developing country, is more vulnerable to the adverse effects of climate change, astrong case can be made out for more Indian companies to make such disclosures.

Since certain industries are more vulnerable than others to the economic impact of climate change,40

the needfor compulsory climate change related disclosures by companies requires serious consideration by Indian regula-tors. However, this would require investors to proactively pursue the matter 41 in India, particularly from insti-tutional investors.

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1Venkatesh, Mahua, Come Clean, Show Your Green, Khurshid , The Hindustan Times, 14 th January 2010,

2 The SEC occasionally provides guidance on topics of general interest to the business and investment communi-ties by issuing interpretive releases or guidance. See

3 SEC Sets Corporate Climate-Change Disclosure Standard , Bloomberg Business Week, 27 th January, 2010,

4 Schapiro, Mary (Chairman, SEC), Speech by SEC Chairman: Statement before the Open Commission Meeting onDisclosure Related to Business or Legislative Events on the Issue of Climate Change , 27 th January, 2010,

5 Garrett Jr., Ray, Speech on The Disclosure Philosophy , 20 th February, 1975,

6 SEBI Report of the Sub-Committee on Integrated Disclosures, 21 st January, 2008,

7 Investors Push Congress for Full Corporate Disclosure on Climate Change Risks, CERES-News, 31 st October,2007,

8 Overview, Carbon Disclosure Project,

9 About, The Climate Registry,

10What is GRI?, Global Reporting Initiative, 11Corporate Disclosure, CERES, < http://www.ceres.org//Page.aspx?pid=430>

12 Lubber, Mindy S., Testimony before the Sub-Committee On Securities, Insurance, and Investment of the U.S.Senate Committee on Banking, Housing, and Urban Affairs Regarding Climate Disclosure: Measuring FinancialRisks and Opportunities, 31 st October, 2007, < http://216.235.201.250//Document.Doc?id=231>1 3 Investors Push Congress for Full Corporate Disclosure on Climate Change Risks, CERES-News and Media, 14 Ceres Applauds SEC Decision Allowing Financial Risks in Environmental and Social Resolutions, CERES-News &Media, 15 Major Investors Call for SEC to Require Disclosure of Companies Climate Risks and Opportunities, CERES-News & Media,

16 Supra note 2.

17 Supra note 4.

18 Commission Guidance Regarding Disclosure Related to Climate Change , Securities Exchange Commission, 2 nd February, 2010,

19A report from the management to the shareholders that accompanies the firms financial statements in theannual report. It explains the periods financial results and allows management to discuss topics that may notbe apparent in the financial statements in the annual report., q.f. Additional Glossary Terms, Better InvestingCommunity,

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34 Climate Change Disclosure Becomes an Investor Thing, OMB Watch, 4 th November, 2008,

35 Varottil, Umakanth, Making Impact Disclosure Mandatory, The Hindu Business Line, 6 th December, 2007,

36 Parekh, Sandeep, Integrated Disclosure-Streamlining the Disclosure Norms in the Indian Securities Market

37 For example, see , a website dedicated to debunking claims that climatechange is anthropologically-induced.

38 Winston & Strawn LLP, SEC Issues Guidance on Climate Change Disclosures , 26 th February, 2010, Lexology,39 Ibid 40 Larson, Andrea and Keach, Stephen, Government and Corporate Response to Climate Change ., Vol. , pp. 1-6,Available at SSRN: 41 For a better understanding of the importance of investor activism towards pursuing a change in corporatepractices, See Reid, Erin Marie and Toffel, Michael W., Responding to Public and Private Politics: Corporate Dis-closure of Climate Change Strategies (June 16, 2009). Harvard Business School Technology & Operations Mgt.Unit Research Paper No. 09-019. Available at SSRN:

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