In a letter to the U.S. Securities and Exchange Commission as part of its ongoing review of disclosure, the Carbon Tracker Initiative highlights that fossil fuel company disclosures have not effectively conveyed the risks to company business models of trends towards a low-carbon economy.

Key Findings

The “Management, Discussion & Analysis” (MD&A) component of Regulation S-K requires fossil fuel companies to identify the material legal, technological, political and scientific trends that may affect their businesses and discuss the impact on the company’s financial condition and results of operations.  Notwithstanding this regulatory requirement, few fossil fuel companies discuss how trends towards a low-carbon economy will impact their results and financial condition.

Clearly, existing company disclosures have not satisfied investor demand.  In the 2014 proxy season nearly one out of every five shareholder proposals dealt with energy and climate change. Demand for these disclosures is driven by the underlying risks posed by climate and, more importantly, societal responses to address it.

The letter emphasizes, “Effective disclosure of the market risks from climate change would focus on how low-carbon scenarios would impact commodity demand and price and include the knock-on effects of those shifts on future capital expenditure plans, liquidity and reserves valuations, if any.”

The letter also proposes two disclosure improvements that would address the core, material risks posed by climate reality: disclosures of future Capex by break-even price bands and the carbon content of reserves and resources.  Carbon Tracker believes these proposals would provide investors with leading indicators of which companies are adjusting their business models to a carbon-constrained world.