Lack of transparent disclosure has been an aggravation since my days as an international equity analyst. In my experience, there is only one solution to this aggravation: research. (Occasionally a sharp stick poked at the company directors worked.) The following was prompted by attendance at the ASrIA conference in Hong Kong in September 2011. The challenge to learn as much about the environmental sector in one week for three reasons: (1) How quickly may a Director and Officer become “reasonably” informed? (2) Do Directors and Officers need to know about it to survive? (3) If so, what should they be disclosing to shareholders and how? This is what I learnt…..
Previous titles in this series and on this site are D&O and Peak Everything, D&O and Peak Oil - Carbon - Water - Food, D & O and Bankers and Insurers, and D&O and Peak Everything Responsibilities. The series runs sequentially over these various subjects.
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Previous titles in this series and on this site are D&O and Peak Everything, D&O and Peak Oil - Carbon - Water - Food, D & O and Bankers and Insurers, and D&O and Peak Everything Responsibilities. The series runs sequentially over these various subjects.
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Directors and Officers, Current Disclosure Regulations
Conducting this research to answer the first question above, I was at the end left with a sense of urgency. This was exactly how I felt after the ASrIA conference, but my own reasonable amount of research has confirmed it.
This urgency was heightened when I read the International Energy Agency report World Energy Outlook 2011 published on 9 November[i]. This is the agency that represents the commercial end of energy production. Using its scenario analysis, it says..”cumulative CO2 emissions over the next 25 years amount to three-quarters of the total from the past 110 years, leading to a long-term average temperature rise of 3.5°C. China's per-capita emissions match the OECD average in 2035. Were the new policies not implemented, we are on an even more dangerous track, to an increase of 6°C.” Further “[with] a 450 Scenario, which traces an energy path consistent with meeting the globally agreed goal of limiting the temperature rise to 2°C. Four-fifths of the total energy-related CO2 emissions permitted to 2035 in this 450 Scenario are already locked-in by existing capital stock, including power stations, buildings and factories. Without further action by 2017, the energy-related infrastructure then in place would generate all the CO2 emissions allowed in the 450 Scenario up to 2035. Delaying action is a false economy: for every $1 of investment in cleaner technology that is avoided in the power sector before 2020, an additional $4.30 would need to be spent after 2020 to compensate for the increased emissions.”
Whatever way you look at it, that is five years away. And if you are a Director or Officer of a medium sized company, or a large company, that timeframe is within your strategic planning forecasts.
And as I stated in previous blogs on this subject [see above or to the side], there is a loop between peak food, oil, water and carbon [the FOWC Peaks]. Any effect on one, a catastrophic event flows through to the others.
Mandatory international accounting disclosure regulations
If you are a company anywhere in the world, you report your financial results according to accounting guidelines first set by the International Accounting Standards Board [IASB], via its working body the International Financial Reporting Standards Foundation.[ii] [Well okay the USA has its own, but they are pretty similar]. Complying with these standards is mandatory and is regulated by an Act in each country. Penalties can be both criminal and common law, and attract large fines for companies and Directors and Officers.
Every Director and Officer would be [hopefully] familiar with them.
The standards principal objectives are:
· to develop a single set of high quality, understandable, enforceable and globally accepted international financial reporting standards (IFRSs) through its standard-setting body, the IASB;
· to promote the use and rigorous application of those standards;
· to take account of the financial reporting needs of emerging economies and small and medium-sized entities (SMEs); and
· to bring about convergence of national accounting standards and IFRSs to high quality solutions.
Non mandatory disclosure
However the IFRS also publishes guidelines for disclosure, some of it mandatory and some not.
In December 2010, IFRS issued an International Financial Reporting Practice Statement called Management Commentary.[iii] This was a broad-brush and non-mandatory framework for narrative reporting of a non-statutory nature, that would accompany the statutory financial statements.
As it is non-mandatory, it is not essential. And in the event that the company reporting does comply with IASB statutory reporting, and does not comply with the IFRS statement above, it would still be considered compliant with IASB.
Its flexible approach is intended to ensure that companies internationally “will generate more meaningful commentary to discuss those matters that are most relevant to their individual circumstances”.[iv]
It is primarily forward looking, and compares past forward looking commentary and the differences in outcomes, both financial and qualitative. Its key elements are: [v]
(a) the nature of the business;
(b) management’s objectives and its strategies for meeting those objectives;
(c) the entity’s most significant resources, risks and relationships;
(d) the results of operations and prospects; and
(e) the critical performance measures and indicators that management uses to evaluate the entity’s performance against stated objectives.
In the release, the IFRS statement makes it clear[vi] that its Statement, encompasses both the Corporations Act’s in various countries and also the mandatory Management Discussion & Analysis of Canada and USA [See later]. It provides details of the history of the Statements development at page 19 [nearly ten years of consultations], and its intended to be a guide for those already providing some form of non-statutory guidance and those who are yet to provide such information.
It is high level in what should be reported and giving guidance on the methodology and purpose of the reporting.
Significant Resources and Risks (C) above
However I am going to concentrate on what it says about the guidelines for significant resources and risks. It says, in part, for Resources, “Management commentary should set out the critical financial and non-financial resources available to the entity and how those resources are used in meeting management’s stated objectives for the entity. Disclosure about resources depends on the nature of the entity and on the industries in which the entity operates.”
And for Risks, it says “Management should disclose an entity’s principal risk exposures and changes in those risks, together with its plans and strategies for bearing or mitigating those risks, as well as disclosure of the effectiveness of its risk management strategies….. Management should distinguish the principal risks and uncertainties facing the entity, rather than listing all possible risks and uncertainties. Management should disclose its principal strategic, commercial, operational and financial risks, which are those that may significantly affect the entity’s strategies and progress of the entity’s value. The description of the principal risks facing the entity should cover both exposures to negative consequences and potential opportunities.”
To me that is clear as daylight, having considered the research I’ve reported for Peak Everything, that Directors and Officer should at the absolute least, be collecting, collating, analysing [and hopefully reporting] the consequences for their companies from peak oil, food, water and carbon. As I have suggested, these are not Black Swan or Playtpus events – they are staring us in the face now. Even the International Energy Agency is warning you.
How will you know what your principal risks are if you aren’t measuring them? Then again, I can hear some of you saying “aha!! But the IFRS Statement isn’t mandatory”. Well, let’s see.
Mandatory international management discussion and analysis “MD&A”
Although the IFRS Statement is not called MD&A, comparing all known versions, that is exactly what it is.
And collecting and reporting climate data is reasonably mandatory in various countries. For example in the USA the SEC issued an interpretive release in 2010 called Commission Guidance regarding disclosure related to climate change.[vii] “This interpretive release is intended to remind companies of their obligations under existing federal securities laws and regulations to consider climate change and its consequences as they prepare disclosure documents to be filed with us and provided to investors.”
It speaks of the regulatory regime and how companies may be both directly and indirectly affected by climate change; summarises the regulations; then considers risk factors such as the effects on supply chains; staff; products; rises in costs. Indeed it covers all the issues raised in this series of blogs including the changes in available water, increases in storm intensity, resource constraints and other issues.
At page 15 it goes on to outline responsibilities under MD&A and at footnote 71, says “Management should ensure that it has sufficient information regarding the registrant’s greenhouse gas emissions and other operational matters to evaluate the likelihood of a material effect arising from the subject.” I would call that an obligation for all companies in USA to be measuring their FOWC Peak data, putting a risk factor on it, and in effect pricing its externalities.
It goes on to say that indirect risks as well as direct risks have to be reported under MD&A and possibly under mandatory disclosure sections, subject to materiality.
And MD&As are now mandatory from all levels of reporting communities in the USA, from schools to federal government reporting[viii]. It is also mandatory for listed companies in the Canada[ix]. It is promulgated as, together with the audited statutory financial reporting, to form the backbone of an entity’s reporting.
MD&As are also the subject of quite extensive academic studies, as to their usage and benefits.[x]
So any company with a dual listing in Canada or USA, say, would be preparing MD&A reports using these guidelines for its investors by law.
Some sectors are required by regulation to report their climate change footprint, such as insurance companies with greater than US$500m in premium revenue.[xi]
So, whether you are listed in the USA or a company in any other country, the disclosure regime is there in conventional regulation for you to be collecting this information, and as mentioned previously, if you are collecting, then analysing, then it should be reported.
The USA and Canada are not alone in these regulations. Although expressed differently in the UK, section 172[xii] of its Companies Act 2006 requires Directors and Officer to:
(1)A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have regard (amongst other matters) to—
(a)the likely consequences of any decision in the long term,
(b)the interests of the company's employees,
(c)the need to foster the company's business relationships with suppliers, customers and others,
(d)the impact of the company's operations on the community and the environment,
(e)the desirability of the company maintaining a reputation for high standards of business conduct, and
(f)the need to act fairly as between members of the company.
That looks like it covers off on the FOWC Peaks and my analysis in these blogs. Most companies around the world have similar Acts, so this is not unique.
Although the IFRS Statement is not presently mandatory, my conclusions at the end of this research is that Directors and Officer have an obligation to report under at least, this international MD&A non mandatory reporting regime. For good reason, the risk itself is that it soon will be mandatory.
However I would also argue that existing conventional mandatory regulation demands and places obligations on Directors and Officers to measure their environmental footprint, and disclose it.
I don’t think it requires new regulation as some have suggested. It just requires current regulation to be enforced by governments around the world. That is, it is not regulation that is missing, it is enforcement.
So what is your footprint? How much? Don’t know? As a Director or Officer, you will have to do the numbers.
The questions that prompted this research were: (1) How quickly may a director and officer become “reasonably” informed? (2) Do directors and officers need to know about it to survive? (3) If so, what should they be disclosing to shareholders and how? And the answers are (1) In less than 7 days (2) Absolutely (3) Their FOWC Peak footprint, under existing mandatory disclosure regimes. The End
[i] http://www.iea.org/press/pressdetail.asp?PRESS_REL_ID=426
[ii] International Financial Reporting Standards provide principled based standards adopted by the International Accounting Standards Board “IASB”. Visit http://www.ifrs.org/.
[iii] [iii] IFRS Practice Statement on Management Commentary, A Framework for Anslysis, 8 December 2010, viewed at http://www.ifrs.org/News/Press+Releases/Management+Commentary+Practice+Statement.htm
[iv] Ibid. Page 6. http://www.ifrs.org/NR/rdonlyres/9EA9F29A-3F34-4E39-9388-
[v] Ibid Page 11.
[vi] Ibid. Page 18
[viii] USA Government/s, Federal Accounting Standards Advisory Board, Statement of Accounting Standards Number 15, “Management’s Discussion and Analysis” April 1999 http://www.fasab.gov/pdffiles/15_md&a.pdf
[ix] Canadian Performance Reporting Board from The Canadian Institute of Chartered Accountants “MD&A: Guidance on Preparation and Disclosure, Comprehensive Revision - Update #3.” July 2009
Canadian Securities Administrators set out rules for the preparation of MD&A in National Instrument 51-102 Continuous Disclosure Obligations
[x] This paper investigates the how professional and nonprofessional investors use the information contained in the MD&A portion of the corporate annual report in making decisions. Also analyses the use of XBRL, data tagging for analysis. “The Impact of Information Tagging in the MD&A on Investor Decision Making: Implications for XBRL” January 2009
[xi] On March 17, 2009, the NAIC adopted a mandatory requirement that insurance companies disclose to regulators the financial risks they face from climate change, as well as actions the companies are taking to respond to those risks. All insurance companies with annual premiums of $500 million or more will be required to complete an Insurer Climate Risk Disclosure Survey every year, with an initial reporting deadline of May 1, 2010. The surveys must be submitted in the state where the insurance company is domesticated. See Insurance Regulators Adopt Climate Change Risk Disclosure, available at www.naic.org/Releases/2009_docs/climate_change_risk_disclosure_adopted.htm.
[xii] http://www.legislation.gov.uk/ukpga/2006/46/section/172
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