The SEC ruling and your data center, Part 1

Posted by John Stanley

This is Part 1 of a multi-part post on the SEC’s recent ruling on climate change. This post provides a brief summary of the ruling itself. One or more subsequent posts will drill down into the possible effects on data centers.

SEC: Climate change is material to your business

In late January, the Securities and Exchange Commission (SEC) ruled that public companies must disclose to investors the risks they face related to climate change.  The SEC ruling does not create new rules or modify existing ones–it merely provides interpretive guidance regarding the risk disclosure rules already on the books.

The ruling describes four particular areas where climate change risks (and opportunities) may trigger disclosure requirements:

• Impact of legislation and regulation – Risks may include costs to purchase allowances under a “cap and trade” scheme, cost to retrofit facilities in compliance with new standards, or reduced demand for carbon-intensive goods/services sold by the company. Interestingly, the SEC states explicitly that “a registrant should not limit its evaluation of disclosure of a proposed law only to negative consequences” (p.23). For example, there may be opportunities to profit from selling allowances, or from an increase in the demand for a company’s (low carbon) products.
• International accords – Similar to the impact of domestic legislation, international accords may affect business.
• Indirect consequences of regulation or business trends – Legal, political, scientific, and technological developments associated with climate change can also be material to a company. Again, the SEC asks companies to discuss opportunities as well as risks. New developments may affect price and demand for certain goods and services sold by a company, partners, suppliers, or competitors.  Reputational impacts should also be considered, for companies whose business operations are sensitive to public opinion. (For example, companies to whom branding and image are extremely significant to sales.)
• Physical impacts of climate change – Finally, companies must disclose risks associated with the physical impacts of climate change, such as severe weather, water availability, and the effects of sea-level rise on coastal operations. Higher insurance premiums or an increase in insurance claims are another potential risk.

The text of SEC Interpretive release 33-9106 is available on the SEC’s website, as is their press release regarding the ruling. The Climate Change and Clean Technology Blog also has a post about the ruling with more details.

Overall, the ruling provides businesses–including those in the IT and data center industries–yet another reason to keep energy use and environmental performance on their radar at the highest levels of management.