Should public companies disclose climate change risks?

Presently Securities and Exchange Commission regulations do not require disclosure of climate change risks.  But, if a public company chooses not to disclose it may be putting the company in jeopardy. What are the options?

NYSE

The Disclosure Quandary

Public companies are facing pressure from shareholders to provide more disclosure about the impact of climate-related issues on their balance sheets.

While SEC regulations do not specifically mandate disclosure of climate change risks, the SEC does require public corporations disclose “material” risks. (See  Regulation S-K, Items 101, 103, and 303.)

In the absence of more guidance from the SEC, a public company must determine whether climate change risks rise to the level of materiality. If so, the risks must be disclosed.  If not, should the company opt for voluntary disclosure anyway?  A real issue is how one determines whether or not the risk is material.

If a public company chooses not to disclose, it may face shareholder lawsuits or regulatory sanctions.  In this new green era with activist shareholders and, at least, one activist state attorney general, the peril of a wrong decision is great.

Background

Environmental groups, state treasurers, and pension fund managers have been advocating more complete disclosures by public corporations of climate-related business risks.  These groups petitioned the SEC in 2007 to force companies to provide new guidance regarding disclosure of climate-related risk to investors.  The petition is still pending.

The Ceres Study

Ceres, a group of institutional investor and environmentalists, commissioned two studies looking at the issue of corporate disclosure.

• The first study reviewed the 2008 SEC filings by 100 global companies.  Of those 100 companies, “59 made no mention of their greenhouse gas emissions or their position on climate change; 52 did not disclose how their addressing climate change; and 28 did not discuss their climate risks. New York Times.  According to the report, “the vey best disclosure of any of the companies could only be described as “Fair.”
• The second study reviewed over 6,000 SEC filing by S&P 500 companies from 1995 to 2008.  The study details a very slight increase in reporting over the over the 13 year period.  However, even by 2008, 75 percent of annual reports did not mention climate change and only 5 percent set forth a strategy for managing climate-related risks.

New York Attorney General and Xcel

With the SEC failing to provide any guidance on this issue, New York Attorney General, Andrew Cuomo, stepped in to fill the gap.  Using his authority under New York state law (Executive Law section 63(12) and the Martin Act ( Gen. Bus. Law Section 352)), Attorney General Cuomo subpoenaed Xcel and four other energy companies looking into the adequacy of climate change risk reporting.

Xcel and the attorney general entered into an agreement requiring Xcel to provide detailed disclosure of climate related risks to its business.  Attorney General Cuomo said, “the agreement sets a new industry-wide precedent that will force companies to disclose the true financial risk that climate change poses to their investors.”

Now any corporation that trades on a New York exchange may be subject to similar action from the State of New York.

The Path Going Forward

While not offering legal advice or opinions, there is a consensus among legal writers suggesting that public companies should start preparing to fully disclose climate -related risks.

The experts suggest that public companies begin by:

• Quantifying their current levels of greenhouse gas emissions (GHG) and projected increases in such emissions;
• Preparing strategies for reducing or perhaps offsetting, GHG and dealing with cap and trade legislation;
• Being prepared to respond to investors, regulatory bodies and the general public on the climate risks
• Monitoring closely legislative, regulatory and judicial developments in the states, regions and at the federal level.

The lack of disclosure by such a great majority of pubic corporations is a strong indication of the difficulty they perceive in measuring the financial impact of climate change risk.

As reported at Bloomberg.com, Richard McMahon, executive director of finance at the Edison Electric Institute said, “Power companies can’t accurately forecast the financial impacts of federal climate legislation that is still being written in Congress.”

Public companies now face this conundrum.

• On the one hand, the direction of the Obama Administration points towards more regulation, not less.  Although passage of cap & trade legislation has been delayed, it is still a priority of this administration and congressional Democrats.  Institutional investors and state treasurers will continue to press for more disclosure.
• On the other hand, without clear details about GHG legislation and regulation, companies may find it difficult, if not impossible to appropriately disclose risk.

Nonetheless, public companies should consider voluntarily adopting climate change disclosures.  If they choose not to disclose because they determine that the risk is not material, they should carefully document their decision and be prepared to defend it.

Copyright 2009 KJ Collins

This article is intended to inform you of new developments and issues in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general information only, and you are urge to consult your own lawyer concerning any specific legal questions you have.

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