Investor Groups Continue to Push for More Robust Climate Change Disclosure; New Guidance from SEC Now More Likely

September 8, 2009
by TODD KANTORCZYK
Client Alert Newsletter September 2009

This summer investor activists continued their efforts to pressure public companies for more detailed disclosure concerning risks associated with climate change, while also renewing their efforts to have the Securities and Exchange Commission ("SEC") issue formal interpretative guidance on the materiality of risks posed by climate change. With new leadership at the SEC under the Obama administration, plus the increased legislative and regulatory activity related to the reporting and control of greenhouse gas ("GHG") emissions, the likelihood of SEC guidance on climate change disclosure issues (and environmental issues, generally) coming in the near future has increased.

In June, Ceres (a coalition of investors, environmental groups and public interest groups) and the Environmental Defense Fund issued a report evaluating the quality of climate risk disclosure made by 100 large companies in SEC public filings during the first quarter of 2008. The 100 companies were from five sectors - electric utilities, coal, oil and gas, transportation, and insurance - that the authors characterized as having a high level of exposure to climate risks and opportunities. The climate change disclosures of these companies were evaluated against the Global Framework for Climate Change Disclosure, a framework originally developed in 2006 by a group of institutional investors and other organizations coordinated by Ceres. The report concluded that current climate change disclosure in these SEC filings did not sufficiently apprise investors of potential climate change risk, with only two companies providing what was characterized as "fair" levels of disclosure. The report called out the insurance and transportation sectors as providing particularly weak, or no, disclosures concerning climate change risk.

In conjunction with this report, members of the Investor Network on Climate Risk (another group of investors coordinated by Ceres) and other investors issued a letter to the new chairman of the SEC, Mary L. Schapiro, renewing their request for formal interpretative guidance concerning the disclosure of climate change risks and for additional efforts to enhance disclosure of material environmental, social and governance ("ESG") risks, generally. The letter asked the SEC to take four steps related to disclosure of climate change and ESG risks, including issuing formal interpretive guidance on disclosure of climate change risk, increased enforcement of disclosure requirements related to ESG issues, recognition of shareholder rights to submit resolutions related to ESG issues, and the adoption of rules mandating disclosure of material ESG issues.

The letter is the latest effort to push the SEC to issue formal guidance on disclosure of climate change and ESG issues, and follows the formal petition these same groups filed with the SEC back in September, 2007 (click here for more information). While the SEC has yet to rule on this petition, a number of factors point towards the SEC finally addressing this issue more definitively in the near term. First, in April 2009, the U.S. Environmental Protection Agency ("EPA") issued its proposed GHG reporting rule which would require large emitters of GHG across all sectors of the U.S. economy to report their GHG emissions starting in 2010 on a facility by facility basis. It has been reported that EPA plans to issue a final GHG reporting rule this October. In addition, at the end of June, the U.S. House of Representatives passed the American Clean Energy and Security Act of 2009, which includes, among other things, a national economy-wide cap-and-trade program to control GHG emissions. These two regulatory and legislative developments, plus the ongoing push by states and regional organizations to control GHG emissions, increase the likelihood of companies facing identifiable financial and legal risks associated with climate change, which in turn may increase the likelihood of SEC addressing the issue. Accordingly, public companies can probably expect continued, if not increased, activity associated with climate change and ESG risk disclosures from investors, environmental groups, and also the SEC.