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Risks of “Climate Change”: SEC Highlights Global Need for Business Resiliency Planning and Policies
On January 27, 2010, the U.S. Securities and Exchange Commission adopted an “interpretive guidance” to public companies on existing disclosure requirements as they relate to business or legislative events on the issue of climate change. Such “interpretive guidance” is not a new regulation, but serves to express an intention to clarify existing requirements. It was adopted by a vote of 3 Democrats to 2 Republican commissioners, who in principle are not representing their respective political parties. The interpretive guidance will have a significant impact, both in the U.S. and across the world, on investor relations, risk management and indirectly on corporate social responsibility.
Impact on Business Continuity and Profitability. Climate change could have material impacts on a company’s business. Disclosures of the impact of changes in climate – such as more severe storms, a rise in sea levels, increases in the costs of farm products, etc. – could be a “ material” factor for an investor in deciding whether to buy, sell or hold securities in such a company. Thus, the issue of climate change has, in a sense, always been a material factor for discussion in management’s general discussion and disclosure of risk factors.
The SEC’s Interpretive Guidance. Quoted below, the SEC’s interpretive guidance on January 27, 2010 highlights several specific areas as examples of where climate change may trigger disclosure requirements:
Impact on Global Sourcing. This interpretive guidance is important for outsourcing service providers that support global or globalizing businesses in outsourcing of IT, business processes, call centers, knowledge processing, HR staffing and administration, legal processing and other services. The possibility of severe storms in a service delivery center should thus be reflected in a disclosure about the susceptibility of such a center to service outages and damages to facilities and resulting consequential damages to the reporting public company. Such disclosures should consider the related disaster recovery plans and business resiliency plans that might mitigate such outages and lost business.
What does this regulatory concern mean for global sourcing?
Underscoring Existing “Best Practices.” The SEC’s interpretive guidance has given enterprises a clear path on managing risks related to climate change. This is actually nothing new, since sophisticated service customers have already been demanding disaster recovery plans and contingency sourcing plans as “best practices” in global sourcing. Such plans require considerable attention to scenario analysis, alternative sourcing strategies and contingency planning. Business resiliency planning will require continuing development of policies and procedures, training and testing. What was a “best practice” has now become an even more compelling “best practice.”
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