• New York Attorney General Reaches Major Settlements with Power Producers Regarding Disclosure of Risks of Climate Change
  • January 12, 2009 | Authors: Kevin Poloncarz; Amy June
  • Law Firms: Bingham McCutchen LLP - San Francisco Office; Bingham McCutchen LLP - East Palo Alto Office
  • On October 23, 2008, New York State Attorney General Andrew M. Cuomo, along with former Vice President Al Gore, announced a ground-breaking settlement with one of the nation’s largest coal-fired power producers, Dynegy, Inc. A substantially identical agreement with Xcel Energy was announced on August 27, 2008. In both agreements, Cuomo’s office agreed to suspend its ongoing investigation of potential violations of New York State securities laws related to the companies’ failure to disclose the risks they face from global climate change and forthcoming regulation. As part of the agreements, Xcel and Dynegy agreed to provide detailed disclosure of their climate risk to the U.S. Securities and Exchange Commission (SEC), in settlements that could serve as a template for ongoing consideration of how companies can and should address such risks in their SEC Filings.

    The Xcel agreement may be found at: http://www.oag.state.ny.us/media_center/2008/aug/aug27a_08.html. The Dynegy agreement may be found at: http://www.oag.state.ny.us/media_center/2008/oct/oct23a_08.html.

    Neither of the agreements, formally titled an “Assurance of Discontinuance” (AOD), include any admission or denial on the part of either company, but both provide “full satisfaction of all civil and criminal claims that were or could have been raised with respect to” the alleged violations.1

    The agreements require Xcel and Dynegy for the next four years to include in their respective Form 10-K filings with the SEC detailed disclosures concerning “the material financial risks to the Company associated with the regulation of greenhouse gas ("GHG") emissions in relation to climate change.”2 At a minimum these disclosures must include:

    • Analysis of the Financial Risks from Regulation: Disclosures on the “material financial risks” posed by existing climate change regulation and “expected trends in GHG legislation or regulations likely to be adopted.” Dynegy’s agreement indicates that this includes, but is not limited to, the costs of compliance with the Northeastern states’ Regional Greenhouse Gas Initiative (RGGI), whereas Xcel’s agreement, which was issued prior to the first RGGI auction of allowances, does not expressly reference such costs.
    • Analysis of Financial Risks from Litigation: Discussion of litigation concerning climate change which the company is involved in, as well as the impact of decisions issued by the U.S. Supreme Court, U.S. Courts of Appeals or any other courts which could impact its interests. 
    • Analysis of Financial Risks from Physical Impacts of Climate Change: Discussion of the “physical effects” of climate change, such as the impacts from anticipated sea-level rise, extreme weather events or drought.
    • Strategic Analysis of Climate Change Risk and Emissions Management: Discussion of the risks posed to the company by forthcoming regulation of GHGs, and an in-depth analysis of the company’s existing and anticipated efforts to reduce GHG emissions and the success of such measures already in place, including each of the following:
      • A “Climate Change Statement” summarizing the company’s current position on the issue;
      • An “Emissions Management” report summarizing the company’s GHG emissions for the reporting year and anticipated increases from planned new coal-fired power generating projects; the strategies the company is taking to reduce its climate risk, including actions to reduce, offset or limit GHG emissions; and the success of strategies undertaken to date and a discussion of how the company’s strategies will affect its GHG emissions and achieve GHG reduction goals; and
      • A “Corporate Governance of Climate Change” discussion concerning the company’s “corporate governance process applicable to climate change issues,” including the role of the company’s board and whether environmental performance and achievement of climate change objectives are incorporated into executive compensation.

    Attorney General Cuomo’s investigation of securities violations among some of the nation’s largest coal-fired generators represented just one front in an ongoing effort to forestall construction of new coal-fired generating capacity. Nevertheless, these two settlements could serve as a template for disclosure of climate risk for companies in less carbon-intensive industries as well.

    While a number of investor-led initiatives are increasingly moving the pendulum towards mandatory disclosure of climate risk, there remains a distinct lack of guidance on the obligations of publicly traded companies to disclose the financial risks and opportunities they may face in a carbon-constrained economy.

    Disclosure Under Regulation S-K

    Regulation S-K is the SEC’s general list of disclosure “Items.” 

    Items 101, 103 and 303 of Regulation S-K would appear to be the most applicable to climate change disclosure.

    • Item 101(c)(xii): Regulates disclosure of the “material”3 effects that compliance with “enacted or adopted” laws or regulations may have on an issuer’s capital expenditures, earnings or competitive position. It requires registrants to project the costs of environmental compliance for two years (or longer) and to compare those costs to those of its competitors. Domestically, this may only apply to issuers subject to existing regulations on their GHG emissions, such as those imposed on power producers like Xcel and Dynegy by the RGGI system. However, it does not appear to require disclosure with respect to anticipated costs associated with compliance with emerging regulatory regimes, such as those currently under development by the Western Climate Initiative.
    • Item 103: Requires disclosure of any current and pending administrative or judicial environmental protection proceedings arising under any federal, state or local law if: (1) the claim is "material" to the business or financial condition of the registrant, (2) the claim is primarily for damages or involves potential monetary sanctions, capital expenditures, deferred charges or charges to income and the amount involved exceeds 10 percent of the current assets of the registrant and subsidiaries on a consolidated basis, and (3) the claim involves monetary sanctions unless the registrant reasonably believes that the proceeding will result in no monetary sanctions or the total will be less than $100,000.
    • Item 303: Regulates disclosure of information necessary to understand the issuer’s “financial condition, changes in financial condition and results of operations” in the Management’s Discussion and Analysis (MD&A) section. MD&A disclosure includes “currently known trends, events and uncertainties that are reasonably expected to have material effects,”4 and such disclosure is limited to information available “without due effort or expense.”5 Predictability and materiality are central to whether an event qualifies as a “known trend” or “event” for purposes of Item 303 disclosure. Unless an issuer can determine that the trend or uncertainty is not “reasonably likely” to occur, the issuer must assume that it is and disclose the related risks, unless it also finds that its occurrence is unlikely to have a “material” effect on its interests. Disclosure is optional when management is merely anticipating “a future trend or event, or anticipating a less predictable impact of a known trend, event or uncertainty.”6

    Statements made by President-Elect Obama and changes in the leadership of important Congressional committees since the November election suggest that it is increasingly more likely that domestic issuers will become subject to a mandatory cap and trade regime which imposes significant costs upon them in the near-term (to purchase emissions allowances through some form of auction or to reduce their emissions through some less costly means). For disclosure purposes, it appears that climate change regulation is on the verge of ripening from an “uncertainty” or “trend” (for which disclosure is only optional) to an “event” (for which disclosure is mandated), at least for issuers in carbon-intensive sectors.

    However, the nature and scope of a particular domestic issuer’s compliance obligation remains unclear. Whether and to what extent a particular company should be disclosing these risks under Regulations S-K remains unclear as well. Companies that are currently disclosing climate risk in their Forms 10-K are doing so in widely varying ways. 

    Calls for SEC guidance have come not only from environmental groups seeking to focus both public and industry attention on climate change, but from the investment community as well. An investor-led initiative, the Coalition for Environmentally Responsible Economies (CERES), has been calling for improved climate change disclosures from public corporations for some time and, in September 2007, joined with Attorney General Cuomo, Environmental Defense and a number of large institutional investors in petitioning the SEC to clarify the obligations of publicly traded companies to disclose risks and opportunities related to climate change. Although the petition is still pending, in a May 20, 2008 letter to the U.S. Senate, a coalition of investors led by CERES and the Investor Network on Climate Risk called upon Congress to cause the SEC to clarify climate change reporting obligations, and to enact strong legislation that would impose a comprehensive framework for reduction of GHG emissions.

    On October 22, 2008, CERES submitted comments to the SEC’s 21st Century Disclosure Initiative, again emphasizing the need for the SEC to modernize the SEC disclosure system in a way that would respond to the “strong and growing needs of investors for better corporate disclosure of climate risks.”

    In parallel to these efforts to petition for mandatory disclosure of climate risk, investors have also been moving forward with voluntary initiatives to enhance climate change disclosure. As an example, leading institutional investors representing $4 trillion in investments launched the Global Framework for Climate Risk Disclosure to provide a method for investors to accurately analyze a company’s climate risk and opportunities in each of the following four areas: (1) Greenhouse Gas Emissions; (2) Strategic Analysis of Climate Risk; (3) Assessment of Physical Risks of Climate Change; and (4) Regulatory Risks.

    Similarly, the Carbon Disclosure Project, which consists of institutional investors holding $7 trillion in assets, has, for the past eight years, been sending its questionnaires to an increasing number of corporations, asking them to report on the business risks and opportunities associated with climate change, their response strategy, whether and how they are accounting for and seeking to reduce their GHGs emissions, and how they communicate about climate change to consumers and shareholders.

    Major investment banks have also begun to address climate risk in long-term planning decisions. In February 2008, Citigroup, JPMorgan Chase and Morgan Stanley released “The Carbon Principles,” establishing guidelines and “Enhanced Diligence” requirements for power plant investment decisions that “tak[e] into consideration the value of avoided CO2 emissions.” (Press Release, Citigroup, JPMorgan Chase and Morgan Stanley, “Leading Wall Street Banks Establish The Carbon Principles: Guidelines to strengthen environmental and economic risk management in the financing and construction of electricity generation,” Feb. 4, 2008, at: http://www.citigroup.com/citigroup/press/2008/080204a.htm.)

    Together, these moves suggest that, independently of enforcement and regulatory efforts, sophisticated institutional investors are already insisting on more robust consideration of climate risk. 

    Thus, although the regulatory landscape may remain unsettled and the SEC has yet to issue an interpretive release on how companies should address climate risk in their Form 10-K statements, for companies in the most carbon-intensive sectors, it may no longer be an option simply to dismiss that risk as too remote. The Xcel and Dynegy settlements further underscore this point and issuers in carbon-intensive sectors will want to study them carefully when considering the adequacy of their own disclosures of climate risk.


    1 § 2, Dynegy AOD; § 2, Xcel AOD.

    2 § 1, Dynegy AOD; § 1, Xcel AOD.

    3 Materiality is defined here in the same way as it is defined throughout the securities laws. Material information is information “to which there is a substantial likelihood that a reasonable investor would attach importance in deciding to buy or sell the securities registered.” 17 C.F.R. § 230.405.

    4 Concept Release on Management’s Discussion and Analysis of Financial Condition and Operations, Exch. Act Release No. 6211, 52 Fed. Reg. 13,715, 13,717 (Apr. 26, 1987).

    5 17 CF.R. § 229.303 (2005) (Instruction 2).

    6 Management Discussion and Analysis of Financial Condition and Results of Operations: Certain Investment Company Disclosures, Sec. Act Release No. 6835, 54 Fed. Reg. 22,427, at 22,430 (May 24, 1989).