On 2 February 2010, the Securities and Exchange Commission (SEC) issued guidance to public companies on the SEC’s disclosure requirements as they relate to climate change. This guidance reflects a growing consensus that climate change legislation and regulation, in addition to the physical impacts of climate change, could affect the operating and financial decisions as well as the future performance of many publicly traded companies. Determining whether these effects are “material”—which would trigger disclosure—requires systematic processes for gathering, analyzing, and documenting a substantial amount of company-specific information, as the SEC guidance suggests. In this paper, NERA Senior Vice President and Environment Group Head Dr. David Harrison outlines how the NERA Carbon Financial Impacts Model—which includes company-specific information along with a state-of-the-art economic model—can be used to assist companies in evaluating the financial effects of climate change policies.

The NERA Carbon Financial Impacts Model is ideally suited to assist a company in several ways:

• Helping the company to develop appropriate strategies for making investment and other major decisions, independent of any SEC disclosure requirements;
• Providing the systematic processes required to assess materiality in light of SEC guidance—including international and indirect effects as well as uncertainties on whether legislative and regulatory policies might be adopted and on what their provisions might be;
• Supplying a verified third-party set of procedures that can be disclosed to auditors requesting information on a company’s internal compliance systems for identifying and quantifying potential effects of climate change on their operations; and
• Providing a rigorous due diligence review of other procedures the company has developed to comply with the SEC guidance.

NERA has used the NERA Carbon Financial Impacts Model to evaluate financial impacts and implications for key decisions for companies in many sectors, including electricity, oil and gas, refining, petrochemical, cement, pulp and paper, iron and steel, chemicals, and aluminum.