Disclosure of weather and climate related risks

The Securities & Exchange Commission (SEC) has issued a guidance note to clarify what publicly traded companies should be disclosing about their climate change related risks effects on business operations. As well as disclosing things like emissions management, companies should now disclose anything to do with the physical impacts of the changing weather.

That sounds a lot like a call for full disclosure of the value of a businesses operations which are at risk from impacts due to the weather or climate factors (see this CERES document for more on the SEC guidance).

Disclosure of those risks can only help to highlight the depth of risk faced and the need for appropriate weather risk management techniques to hedge against them.

It will be interesting to see if this raises the profile the weather risk management industry and its link to climate change management, or ILS market players that participate in underwriting these kinds of climate related risks, or new tools like parametric triggers that can help in hedging.

It could also highlight the fact many companies operate with significant amounts of catastrophe risk that is unhedged as well, another issue I’d say requires greater disclosure around it.

On a similar note, CelsiusPro AG of Switzerland and the Institute of Accounting, Controlling and Auditing of the University of St. Gallen have issued a white paper and press release on this topic but in relation to European utilities. The full press release and a link to the whitepaper are below.

White Paper – Disclosure of Weather Risks of European Utilities

The Institute of Accounting, Controlling and Auditing of the University of St. Gallen in cooperation with the Swiss weather risk specialist CelsiusPro AG has published a white paper about the disclosure of weather risks in the annual reports of European utilities. The study examines two aspects of the disclosure of weather risks in annual reports: The overall disclosure of weather related risk and the disclosure of information regarding the quantification of weather related risks (risk reporting).

• Climate change is becoming ever more relevant to weather dependant companies
• Level of weather risk disclosure in annual reports of European utilities is often unsatisfying
• Study analyses German, Austrian, British, French and Swiss reports
• White Paper of the Institute of Accounting, Controlling and Auditing of the University of St. Gallen in cooperation with the Swiss weather derivatives provider CelsiusPro AG
• January 2010: SEC issues guidance about disclosure of climate change risks and opportunities

Conclusion:

The study shows that there is no regular disclosure of weather related risk. Weather is oftentimes only mentioned in annual reports when it has a negative effect on the business and explains a loss of revenue. However, only very few companies disclose the weather risk systematically in the risk reporting section of the annual report. Whilst German and French companies describe more accurately weather risks in their annual reports, Swiss and Austrian reports are lagging behind. Taking in to account the ongoing climate change more transparency and quantification of these risks is needed as they can result in large revenue fluctuations.

Download the whitepaper in PDF format here.