Climate Disclosure

American Electric Power produced 145.4 million tons of carbon dioxide in 2006. Fortunately the company has no operations in the EU, where legislation limits carbon dioxide emissions and where carbon allowances go for $28.50 per ton. But should any of the 80 climate change-related bills currently before Congress ever pass and limit carbon dioxide emissions, AEP could be on the hook for billions of dollars.

And that is information investors would want. Which is precisely the point behind the mid-September 2007 petition filed with the SEC by 22 leading U.S. and European institutional investors representing more than $1.5 trillion in assets. Maintaining that they require uniform disclosure practices to evaluate risk and balance their portfolios, the petitioners asked the commission to issue an interpretation clarifying that material
climate-related information must be included in corporate disclosures under existing law. They also asked the SEC to evaluate disclosure practices. "Show me the money" time, it seems, is well on its way for climate change risk disclosure.

"The drivers of climate change risk disclosure to date have been the usual suspects, such as environmental advocacy groups, Al Gore and concerned celebrities," says Norman Dupont, chair of Richards Watson & Gershon's climate change group. "But now we've moved from 'Free Willy' to Wall Street, in the sense of a significant shift among those who are pushing climate change issues."

The SEC, not to mention Congress, appears to be listening.


Changing Climate
According to Friends of the Earth, a federation of autonomous environmental organizations in 70 countries, less than 50 percent of publicly listed U.S. companies make some reference to climate change in their filings. And the quality of the disclosure is questionable. A January 2007 study of S&P 500 companies conducted by Ceres, a national coalition of investors and environmental groups, and Calvert, a large asset manager, revealed that disclosure from the 228 respondents fell well short of what investors wanted to know.

Still, the SEC hasn't insisted on such disclosure to date and in fact failed to respond to two earlier letters from groups of institutional investors. So it was significant that SEC staff agreed to meet with the petitioners sometime in December. At press time it wasn't yet known what the SEC's substantive position would be, but all indications were that the heat would be on to do something.

Just two days before the petition's filing, for instance, New York Attorney General Andrew Cuomo launched an investigation into whether the plans of five large energy companies to build coal-fired power plants posed undisclosed financial risks about which investors should be aware. The investigation highlights the potential value of securities laws in governments' fight against global warming.

Indeed, on Oct. 31, the Senate Banking Subcommittee on Securities, Insurance and Investment convened a hearing on the petition. Among the witnesses was Jeffrey Smith, an environmental law partner at Cravath, Swaine & Moore and former chair of the ABA's Committee on Environmental Disclosure. He testified that voluntary-based reporting falls short in meeting the needs of investors. "This wasn't the Sierra Club calling for mandatory disclosure," Dupont says. "It was Cravath."

Less than two weeks earlier, on Oct. 18, Sens. Joe Lieberman and Kurt Warner introduced America's Climate Security Act of 2007. If passed, the legislation will require the SEC to issue regulations requiring material disclosure of climate change risk within two years of the law's enactment. The bill is currently before the full Senate Environment and Public Works Committee.

"When you get two dead center senators running with this, it becomes very instructive," says Rachel Kronowitz, a partner at Gilbert Randolph. Equally instructive is the dramatic increase in shareholder resolutions relating to climate change and disclosure.


Shareholder Revolt
"There were fewer than 10 such resolutions in both 2000 and 2001, but there were 47 in the first half of 2007, and I expect even more in the second half of the year," Kronowitz says.

According to Kronowitz, most of the 47 resolutions were withdrawn after management promised to consult with shareholders and make changes to climate disclosure practices.

"Shareholders' groups will in the first two quarters of 2008 be looking to see whether they got the disclosure they bargained for," she says. But just what they'll get at the outset isn't clear. Dupont believes that at this stage investors can't hope for more than relatively generic statements identifying the potential risks.

"At the beginning, we'll see an identification of physical risks, where companies name facilities--like those near the ocean--that could be affected by climate change," he says. "We'll also see emissions disclosures."

But full climate change disclosure requires quantification of these physical risks and regulatory and compliance risks. Such quantification is difficult, however, because there are a wide variety of accepted models of climate change, and many of them have different outcomes.

"When mandatory disclosure arrives, quantification will be the real challenge," says Steven Shimberg, counsel to DLA Piper's regulatory and government affairs department. "At this point no one should be required to be definite about the numbers."

In a novel twist on climate change disclosure, however, a Maryland-based mutual fund, the Free Enterprise Action Fund (FEAOX), wants the SEC to force companies lobbying for global warming regulation to disclose precisely why they are doing so.


Confusing Messages
According to the petition filed by FEAOX on Oct. 22, 2007, corporations lobbying for global warming regulation "may actually be lobbying against their own shareholders." FEAOX reasons that it is not just global warming, but also global warming regulation that presents threats to corporate earnings and shareholder values.
FEAOX cites Wal-Mart, which has embraced global warming as a key sustainability initiative. As part of its strategy, the company requires some of its suppliers to provide estimates of the energy used to make various products.

"The consequences of this reporting stipulation may harm Wal-Mart's business," the petition states.
"FEAOX may have something there," Dupont says. "Why shouldn't investors know when companies are pursuing goals that, however noble, impact adversely on profits?"


In other words, climate change disclosure could go in any direction--and in many directions.

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Julius Melnitzer

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