• Climate Change Issues for Management
  • July 14, 2009 | Authors: Thomas A. Hamilton; Charles M. Hungerford
  • Law Firms: Jones Day - Cleveland Office; Jones Day - San Francisco Office
  • On September 18, 2007, a Petition for Interpretative Guidance on Climate Risk Disclosure was filed with the U.S. Securities & Exchange Commission by a group composed of investors, environmental groups, and state officials. The Petition requests that the SEC issue guidance clarifying that:

    • registered companies must perform a thorough review of the implications of climate change upon their financial condition and operations, including calculation of their current and projected greenhouse gas emissions; and
    • registered companies must disclose climate change financial risks that are material, including physical risks, financial risks associated with present and probable future regulation, and legal proceedings.

    While the SEC has not yet acted on the Petition, the steady drumbeat from investor activists and environmental groups for increased disclosure of financial risks associated with climate change is unlikely to slow anytime soon.

    Investor Groups Renew Call on SEC to Require Climate Change Disclosures

    Two reports were jointly released in June 2009 by Ceres, the Environmental Defense Fund, and the Center for Energy and Environmental Security asserting that climate change-related disclosure continues to be weak or nonexistent in SEC filings by large companies.

    Climate Risk Disclosure in SEC Filings assessed climate change risk disclosure in 2008 by 100 global companies in the electric utility, coal, oil and gas, transportation, and insurance sectors. Overall, the report found "[f]ifty-nine companies made no mention of their greenhouse gas emissions or their position on climate change, 28 had no discussion of the climate risk they face, and 52 failed to disclose actions to address climate change." Similarly, Reclaiming Transparency in a Changing Climate reviewed climate change risk disclosures by S&P 500 companies from 1995 to 2008. This report concluded that 76 percent of annual reports filed by S&P 500 companies in 2008 failed to mention climate change and only 5.5 percent provided a strategy for managing and mitigating climate change risks.

    The bottom line is that both reports allege that investors are not getting from SEC filings the information necessary to assess imminent risks from climate change, as asserted in the pending SEC Petition.

    ASTM Releases Draft Standard for Financial Disclosures Attributed to Climate Change

    ASTM International is developing a new standard to provide guidance for the disclosure of financial impacts attributed to climate change in audited and unaudited financial statements. A first draft of the standard was considered in October 2008, and a second draft currently is under review.

    The objective of the draft standard is to identify when financial disclosures attributed to climate change are warranted and what the content of such disclosures should be. Various factors identified in the draft standard are to be considered in evaluating whether or not to disclose financial impacts, including existing and predicted changes in governmental regulations related to climate change that could have a material effect upon the business. In addition, predicted changes in resource costs and availability, as well as predicted changes in a company's physical assets that are attributed to climate change, are to be considered as well.

    If disclosure is warranted, the disclosure should identify the company's historic and current greenhouse gas emissions (if any), assess risks and opportunities associated with climate change, and include management's strategic analysis of the financial impact of climate change on the company. Assistance in estimating the financial impact of climate change is provided by existing ASTM Guide E 2137--"Standard Guide for Estimating Monetary Costs and Liabilities for Environmental Matters."

    As with other ASTM standards, when finalized, this standard will in all likelihood be considered good commercial and customary practice. As such, and especially until guidance from the SEC is issued, any final ASTM standard would provide very important guidance to companies that file or issue financial statements. The final ASTM standard could also have impacts beyond disclosures in financial statements. The new standard could provide a framework for development of corporate strategies for future growth and expenditures considering the potential impacts of climate change. A new standard could also affect the calculation of damages in litigation related to climate change and the evaluation of claims against insurers.

    New York Attorney General Reaches Settlements With Energy Companies For Climate Change Disclosures

    In September 2007, New York Attorney General Andrew Cuomo initiated investigations of five major energy companies. The investigations concerned potential violations of New York State securities law regarding the adequacy of disclosures to investors in the companies' 10-K filings with respect to climate change-related risks and greenhouse gas regulation. In August 2008 and October 2008, the Attorney General entered into settlement agreements with Xcel Energy Inc. and Dynegy Inc., respectively, wherein both companies agreed, without any admission of liability, for the next four years to disclose in their 10-K filings:

    • an analysis of financial risks from present and probable future regulation of greenhouse gas emissions;
    • an analysis of financial risks from litigation related to greenhouse gas emissions;
    • an analysis of financial risks from physical impacts of climate change, including increased sea levels and extreme weather conditions; and
    • a strategic analysis of climate change risk and emissions management, including each company's current position on climate change, current and anticipated greenhouse gas emissions, and reduction strategies and corporate governance actions concerning climate change.

    Interestingly, personal jurisdiction for one of these enforcement actions was based on the New York State Common Retirement Fund's "significant" holdings of stock in the company, which did not provide services in the state, an expansive interpretation that could apply to many registered companies that conduct no ordinary business in New York. Indeed, in announcing the settlement, Attorney General Cuomo stated, "This landmark agreement sets a new industry-wide precedent that will force companies to disclose the true financial risks that climate change poses to their investors."

    In the absence of a final ASTM standard or guidance from the SEC, the disclosures required by the settlements with the New York Attorney General probably represent a defensible template for those companies that wish to make climate change-related financial disclosures.

    State Insurance Regulators Require Disclosure of Climate Risks by Insurers

    The National Association of Insurance Commissioners (NAIC), a voluntary organization of the chief insurance regulatory officials in the 50 states, the District of Columbia, and five U.S. territories, recently adopted a requirement that large insurance companies must disclose to state insurance regulators the financial risks those companies face related to climate change. According to NAIC, climate change will have "huge impacts" on the insurance industry. The mandated disclosure requirements are intended to help state regulators better understand the climate change risks faced by the insurance industry, which include potential impacts on insurer solvency, and on the future availability and affordability of insurance.

    The disclosure obligation is satisfied by annual completion of an "Insurer Climate Risk Disclosure Survey" to the domestic insurance regulator in the insurer's lead state. The survey consists of eight topics, including questions related to air emissions and climate change-related risks associated with the assets and business of the insurer, the impact of climate change on the insurer's investment portfolio, and the steps the company has taken to encourage policy holders to reduce losses caused by climate change-influenced events. The first set of disclosures is due in 2010 from insurance companies with premiums in excess of $500 million in 2009. The threshold is lowered to $300 million in 2010 and later years.

    The disclosures will be available to the public and could be a valuable source of information in evaluating competing insurance companies. They may also provide insight into how to assess climate change-related risks and may assist other types of companies in evaluating their own potential risks.

    (Additional detail on climate change-related financial disclosure topics can be found in a recent Jones Day Practice Perspectives article entitled "Financial Disclosure of Climate Change Risks.")