The responsible company

Environmentalists and investors worried about climate change are turning up the pressure on companies to disclose financial risks related to global warming and other environmental factors while pleading their case with state and federal regulators.

Investor resolutions related to climate change in general have increased from six in 2001 to almost 50 in 2007, accounting for more than 10 percent of all shareholder resolutions filed, according to Senator Jack Reed, D-RI. Some advocates place that number much higher.

But in recent months, institutional investors, environmentalists and investor advocates have taken their demands for more risk disclosure from shareholder meetings, where such resolutions are nonbinding and often ignored, to Washington, DC, where those issues are finding a more willing audience on Capitol Hill.

They also have begun actively lobbying the SEC to issue interpretive guidance that would require companies to disclose financial risks related to a wide array of potential environmental changes, ranging from extreme weather events that could wipe out crops to new carbon emission standards that could cost billions to implement.

‘There’s a freight train coming,’ says Leslie Lowe, director of the energy and environment program at the Interfaith Center on Corporate Responsibility in New York. To prevent a crash, she says, ‘We want to know if the engineer is at the switch.’

The Carbon Disclosure Project (CDP), which represents 315 institutional investors with more than $41 trillion in assets, surveyed 56 S&P 500 companies last year, finding that 81 percent regard climate change as a commercial risk, while 69 percent consider it a ‘business opportunity’. Yet when the CDP examined 10K filings, it found any mention of climate change risk – or opportunity – to be rare.

The latest push to achieve broader disclosure kicked off last September, when some 22 fund managers representing an estimated $1.5 trillion in assets signed a petition to the SEC urging it to ‘clarify that publicly traded companies must assess and fully disclose the financial risks from climate change.’

It’s the risk, stupid

The specific information they want disclosed varies from industry to industry and falls under a broad and potentially subjective rubric of ‘material risk’. Any new requirement could force some corporations to put in place monitoring systems that could prove costly and difficult to implement, some environmentalists concede. Both factors have made such campaigns controversial.

But the clout of those calling for the new rules is making the demands hard to ignore. Among the petitioners in September were the top financial officers and state treasurers of California, Florida, Kentucky, Maine, Maryland, New York City and New York State, North Carolina, Oregon, Rhode Island and Vermont, in addition to the California Public Employees’ Retirement System (CalPERS) and Pax World Management.

‘Climate change is affecting the business environment in numerous ways that can have material effects on registrants’ performance and operations,’ the petitioners wrote in an accompanying letter to John White, director of the SEC’s division of corporation finance.

‘The inadequate and inconsistent state of current climate risk disclosure is of critical importance to millions of investors, and to the ability of our financial markets to adjust to the regulatory and physical changes resulting from climate change,’ the letter went on.

A supplement of between 10 and 40 pages was slated to reach the SEC in May this year, detailing further evidence of the undisclosed and mounting financial risks to corporations, says Sean Donahue, a Washington, DC-based attorney who helped draft the petition for the Environmental Defense Fund, a member of the investor coalition. Those risks include a number of proposed state laws that could cap greenhouse gas emissions, along with emissions performance standards for power producers that could affect corporate profits.

In addition, a number of additional investors have since sent letters of support, including a coalition of European investors with $5 trillion worth of investments, says Peyton Fleming, spokesman for the Boston-based environmental coalition Ceres.

States leading the charge

State and federal lawmakers, meanwhile, also are weighing new laws mandating disclosure requirements. In California, Senator Dean Flores introduced legislation in February that would require companies registered in that state to disclose climate-related risks. This legislation is believed to be the first on a state level.

In Washington on October 31, 2007, the Senate Banking Subcommittee on Securities, Insurance and Investment held hearings on climate risk disclosure, exploring the issues raised in the September petition and calling for a number of economists to contribute ideas.

The banking committee’s chairman, Senator Christopher Dodd, D-CT, and the subcommittee’s chairman, Senator Reed, followed up with a letter to SEC chairman Christopher Cox dated December 6.

‘We believe the SEC should issue definitive guidance in the form of an interpretive release to ensure greater consistency and completeness in disclosure of material information related to climate change and current and probable future governmental regulation of greenhouse gas emissions; provide information for registrants on whether and how to disclose such matters; and ensure that investors have access to material climate change information,’ the letter said.

‘The risks and opportunities posed by climate change today and in the future are becoming increasingly apparent,’ the senators wrote. ‘Even so, climate change disclosure has not increased commensurate with these developments.’

Senator Robert Menendez, D-NJ, announced at the hearing that his staff was formulating legislation to require climate risk disclosure. A separate Senate panel, the Committee on Environment and Public Works (CEPW), also has considered the issue.

The CEPW penned a bill that would institute a ‘cap-and-trade’ proposal for carbon emissions. Authored by Senators Joe Lieberman, I-CT, John Warner, R-VA, and Barbara Boxer, D-CA, the original language would have required limited reporting of some climate risks, and was removed before the bill passed the full committee in December, Donahue says. 

‘That bill is going to be enormously controversial anyway and to have financial disclosure as part of it would make it even more complicated,’ Donahue says. ‘We didn’t think we needed legislation, so we were not enormously upset about it. We think that the SEC has plenty of authority already to do what we want them to do.’

SEC spokesman John Nester declines to comment on the petition, noting that it is an ongoing matter for review, though he adds: ‘We are committed to robust disclosure by companies of material environmental issues.’

Just what is material?

‘The key requirement for triggering disclosure is that the impact or potential impact will be material to a company and therefore material to investors,’ Nester says, referring to disclosure in general.

Under current regulations, companies are required to report ‘the material affects of compliance with federal, state and local provisions concerning the environment, on capital expenditures, earnings and competitive position; any material pending administrative and judicial proceedings that arise under federal, state and local environmental provisions, being sued for a violation; and finally, in the management discussion and analysis section, any known trends or uncertainties that will or are reasonably likely to have a material impact on a company’s liquidity or income,’ Nester says.

Although Nester has no comment on the calls for interpretive guidance, Donahue says he and a number of other environmentalists and petitioners met with the SEC’s head of the division of corporation finance and his staff in December and had a ‘very good informational meeting.’

‘We have the sense that they are aware of the importance of this issue,’ Donahue says. ‘We understand we have difficulty getting it on the front burner at a time when there are other serious challenges before the SEC and it’s an election year,’ he admits. ‘We are still pushing it and we are confident that this issue is going to only grow in importance.’

‘There is an old adage in business: what gets measured gets managed,’ Senator Reed said at the October hearing, intimating the first steps for companies.

Lowe says that many US corporations still lack environmental management systems capable of ensuring that they are even meeting standards set under current environmental laws, let alone calculating the potential cost from future regulations.

‘We have situations where environmental agencies are giving companies notices of violations under the Clean Water Act or the Clean Air Act, and they are simply filing them away,’ Lowe says.

‘You need a structure where you can report things internally; they move up the chain to management; there’s oversight and a way for regional environmental managers to know when something has gone wrong and deal with it,’ she says. ‘Some companies don’t have that.’

Nor are climate-related risks the only ones about which activists are intent on demanding information. Throughout 2006 and 2007, there were approximately 17 shareholder resolutions related to toxic chemical risks. Last spring, the Investor Environmental Health Network (IEHN) issued a 52-page report on behalf of 20 investment organizations with $22 billion in assets. The report suggested how such risks could be quantified and also included some suggestions on how investors can ‘translate the long-term threats and opportunities associated with toxic chemical issues into prudent portfolio management.’

‘The argument,’ says Richard Liroff, executive director of IEHN, ‘is that if there are inadequate disclosures, then investors get surprised.’ He points to RC2 Corp, an Illinois-based company that experienced a 40 percent revenue decline following toy recalls.

Getting the message
‘If one goes into public records for leaded product reports for China, as far back as 2001 there were lots of recalls. But despite the record of recalls, RC2 in SEC filings had boilerplate language,’ he says. ‘The point is, against the backdrop of these red flags about the risk of lead in Chinese product imports, there’s no special measure taken. The same issue bears on Mattel.’

Some US companies, fortunately, are beginning to respond to the loud and clear demand for greater environmental risk disclosure. Among those mentioned by environmentalists, British Petroleum and Pacific Gas & Electric both provide some level of risk disclosure. And companies including Citigroup, Target and Marriott, meanwhile, voluntarily report their emissions to the EPA, Senator Menendez says. 

But most companies are currently far away from meeting the levels of disclosure the advocates are demanding, and the issue is likely only to gain prominence in the months ahead.