Of the 334 complaints received between the rules’ implementation on August 12 and September 30, 16.2 percent were allegations of market manipulation, 15.3 percent reported on corporate disclosures and financial statements, while offering fraud made up 15.6 percent of complaints. The state with the highest number of tips was California, at 34, followed by New York at 24. Complaints were also filed from international tipsters, ten from China and nine from the U.K.

The statistics were reported in the SEC’s Office of the Whistleblower’s first annually mandated report to Congress on the program’s accomplishments, awards granted and fund balances, including interest and payouts. The SEC Investor Protection Fund, which funds the award program and finances the operations of the SEC Office of the Inspector General’s suggestion program, had an ending balance of $452,788,043.74 on September 30. The Commission also posted its audited financial statements for the fund at www.sec.gov/about/secpar2011.shtml.

“As a result of the relatively recent launch of the program and the small sample size, it is too early to identify any specific trends or conclusions from the data collected to date,” the report noted. “We expect that the Annual Report for 2012 – with the benefit of a full year’s worth of data – will yield such trends and conclusions.”

When the Office of the Whistleblower receives a tip, it is triaged against other recently received reports by Office of Market Intelligence staff and assigned to an appropriate member of the Division of Enforcement, lead by Sean X. McKessy. Complaints regarding existing investigations or that would be better handled by another division or agency are forwarded to the appropriate recipient. While the investigation is ongoing, the Office of the Whistleblower is available to serve as a liaison between the whistleblower and the investigatory staff.

Whistleblowers submitting a claim that results in an action exceeding $1 million are able to apply for an award of ten to 30 percent of the sanctions. When an action may result in a whistleblower award, the SEC posts a Notice of Covered Action on its website and the whistleblower has 90 calendar days to apply for the award. In August, the SEC posted 170 Notices of Covered Action for complaints lodged over the past year. Because the 90 days allotted for the filing of award applications had not passed before the report was written, no data is available on the number of successful applications or the amount any whistleblowers may receive.

Derek Linsell

Corporate Social Responsibility (CSR) is the integration of social and environmental factors into corporate decision-making. CSR is commonly viewed in terms of ‘stakeholder relations’, especially in industries like extraction or water use that have long had to consider their impact on surrounding communities. Stakeholders are persons or groups who are directly or indirectly affected by a project, as well as those who may have interests in a project and/or the ability to influence its outcome, either positively or negatively. Today, CSR has expanded beyond directly-impacted communities to include a more global view of the environment and community.

The importance of CSR as part of a holistic risk assessment strategy is gain acceptance but what is often overlooked is the value-creating potential of a CSR strategy. By designing comprehensive local and global stakeholder engagement and sustainability strategies, companies have the opportunity to create a broader, more inclusive, and continuous feedback process between a range of constituents. This approach not only affects the life of a specific project, but can also offer valuable insight for future operations and business development.

A new type of risk
Risk is understood by most boards and management in the context of a company’s threats, vulnerabilities, controls and counter measures. As Harvard professor and United Nations Secretary General’s Special Representative in Business and Human Rights, John Ruggie, explains in his report CSR as Risk Management “risk arises when a vulnerability exists within an organization’s operating system in the absence of effective controls and countermeasures.”

Nicole Skibola

Traditional risks are generally classified in terms of political, economic, and technological risk.While operations abroad and even in the United States still pose traditional business risks – political regulations or regional economic instability for example – Professor Ruggie raises discussion of a new type of risk called “social risks.”

Ruggie defines social risks as the levers and pressure points imposed by civil society and stakeholders on business and explains that because globalization creates a web of complexity, interdependence, and constant interactions among various stakeholders, businesses are increasingly vulnerable to key players in the dynamic global business system. Ironically, Professor Ruggie points out, “a social risk may arise from what appears to be a sound business decision,” citing examples like labor violations stemming from the business imperative to drive down prices and boost profit margins. Once a risk comes to fruition, the company may then be forced to expend significant resources changing its policies or approaches in the marketplace.

In consultations with international extractive companies, Professor Ruggie explained that “costly project delays often were the result of ‘stakeholder-related risks’” noting that one company experienced a $6.5 billion “value erosion” as the result of mismanaged stakeholder relations. The risks are often even greater for companies that claim to have embraced a CSR strategy, and then experience a major crisis. One only need to look at BP’s stock prices, which have plummeted from a high of $80 in October 2008 to $27 shortly after the Gulf of Mexico oil spill, to their current price of $46 over a year later.

Another interesting, recent response to social risks is the growth of shareholder resolutions in the annual proxy statement. During the 2010 proxy season, for example, shareholders of companies such as Caterpillar, Hewlett-Packard, Motorola and KBR asked for the adoption of human rights policies and assessment mechanisms. Specifically, the resolutions filed with Motorola and Hewlett-Packard urged that the companies develop policies to provide assurance that their, ‘products and services are not used in human rights violations.’ It is notable that these resolutions came in the wake of publicity over the use of conflict minerals in consumer electronics. While these shareholder resolutions are themselves not specifically social risks, they certainly disturb many of the ‘business as usual’ assumptions that traditionally dominate corporate decision-making.

From risk to value creation
Professor Ruggie describes CSR as ‘strategic intelligence,’ emphasizing the importance of social risk management as a value creation opportunity for business. Integrating stakeholders at all levels into decision-making (rather than informing them after substantive decisions have been made) expands the company frame of reference to the issues, problems and opportunities that involve the whole global system or network. “By integrating the business sensing, learning, and innovations gained from CSR programs, companies can better manage their risks and subsequently their economic, social and environmental impacts in a manner that is roughly analogous to what they learn from their customers, a well established form of business intelligence gathering.”

Additionally, as noted by the International Finance Corporation, choosing not to be proactive in establishing relationships with third parties, such as local government officials or NGOs, can quickly become problematic. Once a problem arises, and the multinational realizes the need to elicit support, or to find an intermediary, and perceived reputational risks can hinder a third party alliance. Rather, engaging with stakeholders from the start, as part of a business’ core business strategy “enables a proactive cultivation of relationships that can serve as ‘capital’ during challenging times.”

A Case Study in Stakeholder Value Creation
One company, Philippines-based Manila Water Company (MWC), provides an excellent example of the importance of proactive and strategic relationships with shareholders. As a water company with a mission to provide clean, safe water and sewage services to approximately half of Manila’s population, MWC aimed to have a proactive and open relationship with a number of its stakeholders, including customers, and local NGOs.

Manila is a city that has been historically plagued by unequal access to clean water. Until 1997, 76 percent of households in the eastern zone of Manila, home to 5 million people, did not have access to 24-hour water. Additionally, the rate of water loss was the highest among major cities in Asia, with two-thirds of the water produced lost to leaks and illegal tapping, and only 26 percent of 325,000 households in the metropolitan area had access to clean and affordable piped-in water. Working with the IFC, the Philippines government privatized the state owned utility by granting a concession contract to MWC.

The context of the story behind MWC’s acquisition and mission to revamp the Manila water system is particularly important in understanding its engagement policy. After the IFC directed concession from the government operator to Manila Water, the company launched a “Walk the Line” program.  Once a month, all company staff – from managers to district level representatives – visited their customers, including residents of informal settlements, to consult with them on water access in their community. By adopting a grassroots approach to serving low-income consumers, the company was able to integrate key stakeholders into its operations as a source of intelligence and strategic business planning.

As a result of this engagement and other initiatives, Manila Water significantly improved its service delivery. Between 2004 and 2006, the percentage of households having a 24-hour water supply jumped from 26% to 95%. At the same time, water losses from the system were reduced from 63% to 35.5%. From 325,000 households served at the start of 2004, there were more than 1,000,000 in 2006, including over 848,000 urban poor. By purposefully integrating a permanent stakeholder consultation function into its business development, MWC has not only transformed their service delivery but been established as a global leader in sustainable development and community projects.

The story of the Manila Water Company illustrates the idea that CSR evolving toward broader business imperatives and strategic management rather than philanthropic giving or cause related branding. Consumer and shareholder activism, paired with technology’s unique ability to coalesce remote stakeholders together and communicate instantaneously, has forever changed the world of business. Whether companies choose to perceive various actors along their supply chains as risks or opportunities is indicative of the fact that businesses can no longer ignore them – it is how they decide to integrate these disparate voices and communities that will determine their competitive advantage in the future.

In an increasingly connected and complex world, social and environmental risk management will only grow in importance. Companies that are able to sense and understand these risks will not only be able to better preemptively avoid the costs of misdeeds, but also create better network-based models of information sharing for business innovation.

Derek Linsell is President and CEO of Apricot Consulting. Nicole Skibola is Social Innovation Strategist at Apricot Consulting.

Steve Starbuck

In the 2011 proxy season, resolutions on corporate responsibility issues made up about 40 percent of all of shareholder proposals up for a vote during meetings that took place through June, according to the Ernst & Young corporate governance database. As in 2010, these proposals represented the largest category of shareholder proposals. The 40 percent figure also represents a significant increase over the 2010 full year figure of about 30 percent.

Initial projections by Ernst & Young analysts predicted the proportion of social/environmental proposals would reach 50 percent of all shareholder proposals. However, the actual proportion that came to a vote was 40 percent, partly due to a higher-than-expected number of submitted proposals that were later withdrawn by proponents.

A significant number of corporate responsibility resolutions were withdrawn by proponents, as a result of substantive dialogue with and/or action taken by companies, which is an indication of how company shareholder engagement can lead to mutual agreement on complicated issues. This is a level of success that is not captured in vote outcomes.

The increase in voting support for CSR-related proposals may be a significant factor influencing why companies are increasingly open to reaching an agreement with shareholders on these matters, rather than putting them up for vote on the proxy. For example, of the nine proposals on hydraulic fracturing (a controversial natural gas extraction technique) submitted this proxy season, half were withdrawn due to company action. The remaining proposals, which were included in proxy ballots, received very high levels of support, averaging more than 40 percent of votes cast; one won support from 49.5 percent of votes cast.

Ann Brockett

Investor and Regulator Focus
While the number of CSR resolutions is increasing, so to is the level of support, especially among mutual funds and other important institutional investors. Partly, this is because investors and regulators such as the Securities and Exchange Commission (SEC) are becoming more aware of the reputational and financial risks associated with social and environmental issues. Shareholder proposals have become increasingly prescriptive in asking boards to mitigate potential risks tied to evolving regulations, shifting global weather patterns and heightened public awareness of climate change issues—any of which can affect a company’s business.

These developments have placed more pressure on companies to show they appreciate such risks and are taking appropriate steps to manage them. Board members and senior management need to understand requests for information related to environmental subjects. Just as important, they must work actively to mitigate shareholders’ concerns about environmental issues whether the board considers them legitimate or not. Increasing support on shareholder proposals will put pressure on boards to respond. Although non-binding, failure to respond to a shareholder proposal that receives 50 percent or more of votes cast may result in votes against directors in the following year. First steps toward addressing shareholder concerns related to environmental risks include understanding their investment philosophies and voting policies; knowing who is responsible for key voting decisions; and becoming familiar with shareholders’ history of activism with other target companies.

Greater Support for CSR-Related Proposals
Shareholder proposals are important because they shape the corporate landscape and often frame conversations that take place in corporate boardrooms. Resolutions linked to corporate social responsibility (CSR) historically have been skewed toward social issues. But now, environmental sustainability has become the fastest-growing and most prominent issue, as more institutional investors begin questioning the potential financial impact of CSR issues on their investee companies.

A 2010 survey conducted by ISS, a proxy advisory firm, shows that 83 percent of investors now believe environmental and social factors can have a significant impact on shareholder value over the long term. This belief is clearly visible in the rising level of support for shareholder proposals requesting action related to social and environmental issues.

Additionally, according to our research, the average voting support for CSR-related shareholder proposals rose from 7.5 percent in 2000 to 18.4 percent in 2010, and data for 2011 shows that to date, average voting support on these issues has further increased to 21.4 percent.

Broader support means that proponents gain more traction with investee companies and put greater pressure on their boards. This is especially true if the proposals reach critical thresholds. For example, many boards take note once support levels reach the 30 percent mark. In 2005, only 2.6 percent of all shareholder resolutions related to social/environmental issues received average support of more than 30 percent of votes cast, according to our research. Last year, more than one-quarter of proposals reached the critical 30 percent support threshold, and so far in 2011, the figure has grown to nearly a third.

Regulatory changes are also driving broader support for resolutions linked to environmental risks. In late 2009, the SEC began to allow shareholder proposals to include the phrase “financial risk” in discussing environmental and other issues. In February 2010, the agency issued guidance reminding companies of their responsibility to disclose their material risks related to climate change.

Support From Mutual Funds Grows
A clear example of the growing support for environmentally related proposals comes from the mutual fund industry. According to an analysis by Ceres, a coalition of environmentally oriented investors, average support by mutual funds for climate change-related resolutions grew from 14 percent in 2004 to 27 percent in the 2009 proxy season, and the percentage of abstentions increased as well. In the same period, opposition to those resolutions fell from 76 percent to 55 percent, reflecting a sharp departure from traditional voting policies. The Ceres analysis evaluates proxy votes on climate change-related proposals by 46 mutual fund companies with more than $5 trillion in total assets under management.

Director Expertise, Compensation Targeted
A growing number of shareholder proposals are linking social and environmental matters to traditional governance issues such as compensation and the qualifications of board members. For example, some resolutions advocate tying performance metrics used for determining executive compensation to environmental goals. Others seek to ensure that board members have the environmental expertise needed to deal with sustainability and other environmental issues.

For example, at a 2010 annual meeting for a large oil and gas company shareholders filed a proposal requesting that the company have at least one board member with expertise in environmental matters relevant to hydrocarbon exploration, and that the business and environmental communities recognize the board member as an authority on environmental matters. This proposal received support from 27 percent of the votes cast. A similar initiative last year at a large mining and metals company was supported by 34 percent of votes cast. This year, shareholders of a major energy company asked the company to spell out how it planned to strengthen its risk management function to better prepare for environmentally related incidents, and how it would move to a low-carbon economy.

Corporate responsibility resolutions receiving highest levels of voting support to date include those requesting:

• A sustainability report disclosing the company’s environmental, social and governance performance, including a discussion on water risk and greenhouse gas reduction targets and goals (92.8 percent of votes cast)
• A report on the company’s risk management efforts related to coal combustion waste (52.7 percent)
• A report on the board’s oversight of process safety management and related operational safety efforts (54.3 percent)
• Disclosure of the company’s policies and procedures for making political contributions and expenditures, directly and indirectly, with corporate funds (53.3 percent)
• An amendment of the company’s EEO policy to explicitly prohibit discrimination based on sexual orientation and gender identity (61.7 percent)

The specific proposal requesting a corporate sustainability report received a dramatic and historically unprecedented level of support in part because a similar proposal at that company’s 2010 meeting had received 60.3 percent of votes cast and shareholders appeared to be dissatisfied with the company’s response. Another factor in raising the 2011 support is that, in an unusual step, management recommended that shareholders vote in support of the shareholder proposal.

Actions to Take
Risks related to sustainability, including climate change risk and other environmental issues, matter a great deal to shareholders. Yet many corporate directors lack a deeper understanding of these issues. Board members, as a result, would greatly benefit from formulating a strategy for anticipating shareholders’ future concerns. At a minimum, companies and their boards must be prepared to do the following:

• Enhance dialogue with shareholders and improve disclosure in key areas, particularly those related to social and environmental issues. Robust sustainability reporting can help with this.
• Ensure that directors’ skills are relevant to the chief areas of stakeholder concern, including risk management tied to social and environmental matters. In particular, companies must communicate with shareholders. They could, for example, take advantage of the SEC disclosure rules around director qualifications to explain how the qualifications, backgrounds and skill sets of their directors—both individually and as a group—contribute to overall corporate strategy, including risk mitigation.
• Consider whether using non-traditional performance metrics—including those related to environmental/sustainability issues—could help align compensation with risk. In addition to financial metrics, performance goals could align with overall environmental strategy, including clearly defined metrics relating to energy efficiency, water usage and the reduction of carbon emissions.
• Shareholders are paying closer attention to environmental and social matters, believing them to bear closely upon the risk to which investee companies are exposed and, ultimately, upon the financial performance of those companies. The 2011 proxy season reflects this deepening trend. Driven by concerns about the financial and reputational risks associated with climate change, institutional investors will likely push harder for action on these matters. Forward-thinking companies will be prepared to address their concerns.

Takeaway: Leading Practices in CSR Governance

Shareholder pressure and increasing legislative and regulatory requirements are driving boards to take a more active role in managing corporate strategy and engaging stakeholders. Here are some steps your organization may want to consider taking to improve its CSR-related governance:

• Board. Make sure your board has a standing agenda item to review emerging environmental and social issues, opportunities and risks.
• Board committee. Install a dedicated board sub-committee to oversee the company’s management of environmental and social issues, opportunities and risks.
• Committee composition. Ensure that relevant committees are composed of executive and non-executive directors with the expertise to assess the organization’s progress in environmental matters.
• Materiality. Apply a systematic process to determine which environmental and social issues are most relevant to the organization.
• Accountability. Hold individual leaders accountable for environmental performance, and schedule regular presentations to the appropriate committees to document progress.
• Reporting. Establish clear frameworks for reporting on the issues most material to the organization. Regularly publishing a sustainability report is one of the best ways to do this. Relevant board committees should sign off on all sustainability reports.
• Assurance. Obtain both internal and external assurance of all reports to gain independent insights on emerging risks and progress, and to be confident that disclosures are accurate.

Steve Starbuck is Americas Leader and Ann Brockett is Americas Assurance Leader for Climate Change and Sustainability Services at Ernst & Young LLP.

Highlights of the SEC Guidance
The SEC guidance highlights four ways in which climate change may trigger disclosure obligations:

1. Impact of international climate change accords; Indirect consequences of climate change regulation or resulting business trends, such as (a) decreased demand for carbon-intensive goods and services related to carbon-based energy sources and a corresponding increased demand for goods and services with a low carbon footprint, (b) increased competition to develop innovative products, and (c) increased demand for alternative energy sources;
2. Physical impacts of climate change, such as (a) property damage and disruption to operations on coastlines as a result of rising sea levels or severe weather, (b) indirect financial and operational impacts from disruptions to operations of major customers or suppliers from severe weather, (c) decreased agricultural production in areas affected by weather-related changes, and (d) increased insurance claims, premiums and deductibles for public companies with facilities in areas subject to severe weather.

If material to a registrant’s business, disclosure of the foregoing potential impacts of climate change may be required under Regulation S-K, specifically Item 101 (description of business), Item 103 (legal proceedings), Item 303 (management discussion and analysis) or Item 503(c) (risk factors).

Implications of the SEC Guidance
Public companies should keep the following issues in mind in preparing their annual reports to shareholders, Form 10-Ks and other public filings.

• Consider both the risks and opportunities of climate change: Companies should not focus solely upon the risks of climate change, but also on the opportunities of climate change (such as sales of allowances in a cap and trade system or increased demand for products with a low carbon footprint).
• Consider both indirect and direct risks and opportunities of climate change: The SEC Guidance provides examples of direct climate change risks (such as potential physical impacts or costs to improve facilities) as well as indirect risks and opportunities (such as changing demand for certain goods and services or reputational harm).
• Resolve doubts concerning the materiality of climate change in favor of disclosure: Although the SEC Guidance does not alter the traditional standard of “materiality” — which requires disclosure if a reasonable investor would view the information as important in making an investment decision — doubts whether information is material should be resolved in favor of disclosure.
• Ensure that adequate disclosure controls and procedures are in place to evaluate the materiality of climate change issues: The SEC Guidance does not require public companies to disclose their carbon footprint, but management needs sufficient information concerning greenhouse gas emissions and related operational matters to evaluate the likelihood of a material effect. Therefore, companies must have adequate controls and procedures to process information potentially subject to disclosure. Such controls and procedures should already be in place for management to make required certifications under Sarbanes-Oxley, but disclosure committees should now add an assessment of the materiality of climate change issues to the company’s business.
• Reconcile voluntary and mandatory disclosure of climate change issues: Many public companies voluntarily disclose information regarding their greenhouse gas emissions and climate change risk in corporate sustainability reports and various greenhouse gas reporting programs, such as the Climate Registry, the Carbon Disclosure Project and the Global Reporting Initiative. Companies should ensure that any mandatory SEC disclosure is consistent with prior voluntary disclosure or be prepared to explain any differences.

Richard M. Schwartz is a litigation partner and head of the environmental practice group in the New York office of Fried, Frank, Harris, Shriver & Jacobson LLP. Donna Mussio is a senior associate in the environmental practice group. Coleman Kennedy, an associate in the environmental practice group, also contributed to the preparation of this article.

“Greening the enterprise” can begin when companies switch to alternative energy sources and invest in carbon offsets. Or it can start smaller, with a decision to recycle, use energy-efficient lighting and take other steps to cut energy consumption and limit greenhouse gas emissions.  Either way, it’s serious business: respondents at 150 multinational corporations surveyed by Ernst & Young LLP in 2009 indicated that over the next decade, their companies plan to invest $276 billion to manage the effects of climate change.

As green issues move higher on the corporate agenda, board members must ensure that management considers the tax implications, both positive and negative, of investments and activities related to climate change. Ideally, this will be done while such initiatives are still in the planning stage. Directors can maintain proper focus on green tax issues by keeping in mind the following principles:

1.  Going green can improve corporate performance.
Companies are greening in response to real business imperatives, such as the need to protect and grow the revenue base. Organizations that design and manufacture climate-friendly products and services can take market share from competitors. Energy-efficient organizations that sell their credits on the carbon market can also profit in the new environment. Cost reduction is another imperative. By integrating clean tech into the value chain, companies can realize energy efficiencies that encompass operations, real estate, facilities management and IT. A recent McKinsey report suggests that in the U.S. alone, energy efficiency could save more than $1.2 trillion through 2020.

A third business imperative involves responding to government regulations in the form of mandated compliance and incentives to promote green behavior. Such regulations include the Environmental Protection Agency’s rule requiring companies to disclose their greenhouse gas (GHG) emissions starting in 2010, or the mandate by California Assembly Bill 32 to reduce GHG emissions. Finally, companies must manage the expectations of shareholders, employees, customers and the news media. All of these stakeholders increasingly hold businesses accountable for their environmental actions (or lack thereof). As companies move to address sustainability issues, they will likely make significant capital investments, and perhaps even develop new intellectual property. As firms respond to these four business imperatives, they will confront tax issues at the global, federal and state levels.

2.  Climate change offers a window on the future.
Given the tumult of the last two years, trying to predict what will happen tomorrow may seem futile. Nevertheless, companies (and boards) must try. Although there is no crystal ball, involvement in sustainability initiatives can help directors sharpen their future vision of the enterprise. Mainly that is because the need to reduce carbon footprints, and to assess the risks related to climate change, are concerns that most companies have only recently begun thinking about seriously. Sustainability also creates new market opportunities, alters consumer preferences and buying patterns, reshapes procurement criteria to ensure green purchasing and offers the chance to transform business processes. Directors will take on additional responsibilities in light of new rules and regulations, and will need to manage the risks that emerge as those responsibilities evolve. Many of these risks and opportunities have tax implications. Giving the tax department a seat at the table during future sustainability planning can help the organization anticipate, measure and evaluate tax implications for each green business plan. In advising companies on a strategic course of action, directors inevitably peer into the future to discern what lies ahead. Keeping abreast of tax-oriented climate change influences can help them do it more effectively.

3.  Numerous tax incentives exist to offset investments in energy efficiency.
Many of the investments needed to reduce a company’s carbon footprint can be offset substantially by government incentives. About $430 billion in climate change stimulus funding was made available globally in the last year, much of it in the form of incentives such as tax credits and grants. In the United States alone, the American Recovery and Reinvestment Act of 2009 (ARRA) provides more than $90 billion in tax incentives, grants and loan guarantees. Economic payback models that do not include the full suite of tax incentives could be misleading and result in decisions to scrap projects that otherwise would meet payback criteria. In fact, companies may be able to shave years off the payback period of their investments in energy-efficient technologies and renewable energy programs. Organizations that build or retrofit structures with new lighting or temperature-control systems may discover ways to deduct the associated costs, either on a current basis or over an accelerated period. Even conducting a retrospective review of capital investment from prior years may help identify refunds or additional tax savings. Effective planning is the key to accomplishing any of these objectives successfully. Tax directors can advise on which incentive programs are applicable, and whether incentives can be combined so that the company receives all allowable benefits.

4.  Carbon management requires compliance.
Apart from the many sustainability activities that companies are undertaking voluntarily, there are mandated programs in the U.S. and abroad. Potential U.S. legislation mandates a cap and trade system, which could result in increased costs throughout a company’s supply chain. Multinational companies may already be dealing with GHG regulation such as the European Union’s Emission Trading Scheme. This legislative and regulatory activity is driving a rapidly expanding carbon market, and companies that intend to capitalize on the acquisition of carbon credits and offsets should involve their tax departments early in the process. Tax can provide valuable input on such issues as the appropriate accounting model for the company’s particular carbon management strategy. It can also identify the character and timing of potential gains or losses — a crucial consideration in the absence of GAAP or IFRS directives.

In addition, companies may find themselves exposed to new consumption taxes linked to energy. Just as many countries have for years taxed fuel used for transportation, so are the European Union, Canada, Australia and others now applying similar excise taxes to various forms of fuel consumption. Companies may also face less obvious tax consequences related to climate change. Existing and potential future trading schemes allow organizations to meet their carbon emission obligations through offsets: planting trees in non-forested areas in exchange for an offset credit, for example. What are the tax implications for international offset projects?  Will the company realize taxable income from the sale of the credit? Will intercompany transfers of the credits create transfer-pricing issues? Are there ways to structure offset projects to minimize the tax impact? These questions must be considered carefully, and well in advance.

5. Cooperation between boards and tax can help the company respond more effectively to climate change.
Directors and corporate tax departments should monitor the results of global conferences on climate change—not because any single meeting will determine the exact direction of government initiatives, but because tax incentives and penalties developed by different countries will probably be designed around commitments made at those sessions. Tax departments can help companies prepare for the new compliance burden of any such initiatives, while monitoring international and domestic developments at various levels of government. Working more closely with boards, tax can help align corporate behavior and policies with the dynamics of climate change and sustainability. This kind of cooperation can enable the company to achieve both compliance and competitive advantage.

There is uncertainty about which companies will thrive in the new world of green business. What is clear, however, is that climate change and sustainability are about more than corporate social responsibility or concerns about global warming. While climate change certainly has a political dimension, it also affects the bottom line, which includes significant tax implications.

To advise company management, boards must focus on costs, potential benefits and risks to the organization. Board members should attempt to derive maximum value from their tax departments by including tax professionals early in the design and implementation of any corporate initiatives related to climate change.

Here are some examples of U.S. tax incentives to invest in energy-efficient technologies:

Federal

• Incentives for on-site renewable energy production
• Tax credits for manufacturing advanced energy components
• Credits and incentives to help offset the cost of increasing a building’s energy efficiency
• Deduction for cost of eligible energy-efficiency equipment in construction
• Loans for manufacturers to re-equip, expand and establish manufacturing facilities to produce advanced technology vehicles and their components
• Investment tax credits for qualifying energy facilitie
• R&D tax credit

State

• Credits and incentives to help offset costs of making a building more energy efficient
• Credits for renewable energy production
• Recycling incentives
• Credits for programs to train workers on sustainability
• Funding for “shovel-ready” projects

Kate Barton is Americas vice chair of tax services at Ernst & Young.

Steve Starbuck is Ernst & Young global organization’s Americas leader, climate change and sustainability services.

The views expressed herein are those of the authors and do not necessarily reflect the views of Ernst & Young LLP.

As a frontline corporate director, I’ve seen how the governance workload has increased in recent years.  The time, effort and resources demanded of board oversight often outstrip traditional board structures and membership, and we are forcing our governance systems to play catch up.  But one coming governance change has upended this cause-and-effect evolution.  Boards will soon need a formal risk management committee, or at least a formal risk management structure, in place…or be ready to explain why they don’t.

The demands for a formal board risk structure will force boards to look outside the sometimes-narrow fields of audit and pay, and examine other risk dangers that could be waiting on the doorstep.  This covers many operational, strategic and legal concerns. But my work on the boards of energy and technology companies has alerted me to a very real, pending regulatory risk facing many major corporations.  Worse, hardly any boards seem aware of it.

In March 2009 the U.S. Environmental Protection Agency proposed treating emissions of greenhouse gases (GHGs), such as carbon dioxide, as “pollutants.” This proposal, which seems certain of approval by the end of the year, would launch a whole new set of regulatory strictures.  Beginning in 2011, thousands of U.S. companies would be required to compile and disclose reports on the greenhouse gases they produce.  At least 13,000 facilities would come under the disclosure rules, accounting for 85 to 90% of all industrial GHG emissions in the U.S.

This sounds like a fairly technical item, impacting just the regulatory compliance staff at some utilities and smokestack industries, right?  Well, every major corporation will feel the effect of this new rule, and every board needs to know the risks it may face.  The EPA disclosure rules cover industries as diverse as transportation, electronics manufacturing, agriculture, chemicals, food processing and others.

Facilities would have to meet the disclosure regimen if they emit over 25,000 metric tons of CO2-equivalent GHGs per year.  That sounds like a huge amount, but the EPA proposal notes that this threshold is “roughly equivalent to the annual greenhouse gas emissions from just over 4,500 passenger vehicles.”  Further, if you don’t scientifically calculate the greenhouse emissions from your facilities, how will you know for sure if each is above or below the threshold?

These disclosure rules definitely come under the purview of a board’s risk committee, not only for their reach, but for their potential liability exposure.  Corporations that are out of compliance will face fines of up to $32,000 per day for non-compliance.

Consider this scenario: At your next corporate annual meeting, you as a director face an angry shareholder demanding to know why your board ignored the new regulatory risk that left your company paying out $32,000 daily in fines.

The new EPA rules are part of a new risk oversight trend that all responsible boards must consider.  For the past decade or two, it’s been easy for some boards to accept vague, feel-good, “greenwashing” assurances from management on environmental issues.  No longer.  Tough, enforceable legal disclosures are now the rule.  Corporate leaders and boards of directors, who may have viewed most environmental concerns as public relations issues, must now disclose hard, objective, scientifically validated numbers from their legal and compliance staff.  “Green” no longer means lovable images of wildlife and trees. Now, Green has grown teeth.

In July, the Social Investment Forum was joined by over 50 major movers in activist investing (including Ceres and Calvert Asset Management) in petitioning the SEC to require annual reports from all U.S. public companies on environmental, social and governance (ESG) issues.  Carbon footprint and sustainability would be among the measures required, with the legal accuracy and timeliness mandated for all SEC disclosures.  Also last summer, a new international Climate Disclosure Standards Board (CDSB) was formed to develop solid standards on corporate climate-related disclosures.

The biggest risks your company may face in the years ahead, both in reputation and legal liability, will spring from disclosure that is inaccurate, partial or mishandled.  Corporate “greenwashing” messages are no longer harmless.  Soon, they will be as dangerous as CEO assurances that all is well the day before a major income restatement is announced.

In sum, your board now must not only weigh the risks presented by environmental issues.  You must also weigh how well those issues are measured, disclosed, and reported to legal bodies and in the media.

But it’s not an easy task. Through my involvement with Clear Standards (recently purchased by SAP and renamed SAP Carbon Impact), a software company that developed a solution developed to help corporations meet this “count every molecule” greenhouse gas mandate, I’ve seen first-hand the challenges companies face measuring and reporting GHG metrics.  For example, currently, there are five different international carbon registry groups setting standards for calculating emissions — and all five differ (the formula SAP Carbon Impact uses is approved by all five). With stakeholders and regulators clamoring for increased visibility into the GHG emissions of businesses, a simple seat-of-the-pants, spreadsheet-driven tracking system is simply no longer tenable. Organizations need a well-defined, well-implemented method of measuring and reporting these metrics.

What to measure and how can lead to confusion for even a seemingly simple task.  The Sept. 18, 2009, Wall Street Journal notes how the U.K.’s Carbon Trust, a group formed to help calculate the greenhouse gas impact of retail products, is struggling just to measure the carbon “footprint” of a gallon of milk.

Sustainability mandates and reporting requirements present a real and present danger no board can ignore.  But it is also proving to be an inconsistent, elusive risk, one tricky for a board to manage.  How should directors cope?

• First, review your board and committee charters to see how you specifically address risk management and its oversight.  Stating that overall risk monitoring is in the hands of the full board, with assignment to committees based on their expertise, is an important first step in proving your board takes its risk management role seriously.  It shows thought and effort to craft an effective structure.

• Second, to deal with coming sustainability and carbon disclosure issues, seek ongoing reports to the board from the key staff involved in compliance. Environmental, legal and compliance staff will need to monitor regulatory developments and shape the company’s response structure. Most importantly, for governance purposes, companies must assure that the board is kept well informed. Brand impact and reputational risks are the biggest to consider.

• Finally, note that the coming disclosure regimen doesn’t really seek to force companies to cut their greenhouse gas emissions or carbon footprint.  Instead it focuses on full, accurate and timely data capture and disclosure — with penalties based around that goal. The future might well bring voices who want to use the data collected to drive down emissions (any coming cap-and-trade system will need solid numbers).  But for now it’s just the data that counts.  That means that management (and your board) will need to obsess over the technology used to assure accurate carbon counting.

Midsize corporations, for example, may be at the borderline of the 25,000 metric tons per year reporting threshold.  The pending EPA rules place an affirmative duty on companies to know whether they are above or below this threshold.  If a facility’s total emissions are just above the limit, and you’ve failed to accurately report it, those $32,000 a day fines may be coming.  But suppose you are unsure of a facility’s carbon footprint, start reporting it under the EPA plan, and later find the unit is below the reporting threshold?  The proposed rules feature a “once in, always in,” requirement — once you begin the costly reporting process, you are required to continue doing so as long as the facility is in operation, even if it is below the cutoff levels.  Inaccurate calculation of carbon footprints will cost the company at either end of the scale.

My experience with SAP Carbon Impact has made me aware of how vital accurate, scientifically valid measurement of a company’s greenhouse gases has become. However, I’ve also seen too many boards of directors who are still unaware of the looming risk and management challenge this burgeoning focus on sustainability presents to good governance.

Your board may have less than a year to prepare for this major risk-management challenge. Before your next meeting, ask your legal and compliance staff to prepare a briefing on how the new EPA rules would hit your company. Then, at the meeting, review your exposure and determine whether your board’s structure is up to the challenge of oversight. By considering this topic now, your board gains a head start on shaping the processes and systems needed to address the sustainability issues facing businesses today and in the near future.

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Betsy Atkins currently serves on the boards of SunPower, Polycom, Chico’s FAS, Reynolds American and NASDAQ LLC. She is the former CEO and chairman of Clear Standards, and former CEO of Key Supercomputer and NCI.