Climate change was far from the minds of those who drafted the Sarbanes-Oxley Act–as it is for those who criticize the law today as going too far. Yet the legislation's emphasis on internal controls to manage forward-looking risks makes climate change a vital test of how companies intend to honor SarbOx going forward–and like-wise, how well the law helps companies stem the risks from global warming.
As U.S. Treasury Secretary Henry Paulson remarked in a recent address on SarbOx, "The threshold question [companies should ask] is, 'Is this right?' not 'Do the rules allow us to do this?'" Under Paulson's interpretation, companies must focus less on the minutiae of making legally compliant financial statements and more on the long-term operational, competitive and reputational risks facing their enterprises.
The sheer magnitude of climate change forces just such a holistic and forward-looking view. It combines practical considerations of how companies are managing energy use and greenhouse gas emissions with the broader implications of how this affects their operations; competitive positioning; and ultimately, corporate reputations among consumers, regulators and investors. Hanging over these micro corporate determinations is also the more fundamental ethical question of whether companies are "doing right" by the environment and working to prevent the predicted disaster scenarios rather than contributing to them.
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Having lagged behind in early adoption of measures to control global warming emissions, U.S.-listed firms could now lead in the effective implementation of enterprise risk management strategies to limit the risks and seize the opportunities in a carbon-constrained world. SarbOx, specifically through risk management committees, provides the framework for an institutionalized corporate response.
Though one would expect industries that are especially energy-intensive to have these committees focus on climate change, the practice is becoming more widespread. In the insurance industry, for example, Allianz has brought together experts from its insurance, banking and asset management segments to examine the wide-ranging effects of climate change. American International Group has also formed a climate change policy and assembled a team to invest directly in technologies that cut greenhouse gas emissions. These insurance companies–ever mindful of risk–think of these activities as a form of loss mitigation and enhanced investing.
Accordingly, executives who devote attention to climate change are doing more than "ticking a box." By connecting the issue with ERM and SarbOx internal controls and accounting and disclosure rules such as Regulation S-K and FAS 5, they set an example of how to address many other financial and non-financial issues that bear on the competitive and reputational risks they face in an increasingly global marketplace.
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