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Carbon Transparency

Public companies face rising pressure to disclose climate-change risks.

Fortnightly Magazine - May 2008

that the SEC review the adequacy of existing disclosure and make further inquiries of registrants that have made no, or very little, climate-change risk disclosure. The SEC has yet to respond to the petition or several other prior requests of a similar nature.

Congress also is looking to the SEC to impose greater disclosure requirements on issuers of public securities. Like the Ceres petition, the most recent legislation—“America’s Climate Security Act of 2007,” introduced by Senators Lieberman and Warner in October 2007—would require the SEC to issue an interpretive release regarding climate-change risk disclosure, as well as new disclosure rules, as part of an overarching climate-change and clean-air scheme. The Lieberman-Warner bill was approved by the Senate Committee on Environment and Public Works on December 5, 2007, but no other major action has been taken.

Several regional initiatives to reduce GHG emissions, such as the Regional Greenhouse Gas Initiative, Western Climate Initiative and New England Governors/Eastern Canadian Premiers Climate Action Plan, have been adopted at the state and local level in the absence of federal GHG regulations or ratification of the Kyoto Protocol. A public company operating in a region that has adopted such a regulatory initiative likely would need to consider how compliance with these regulations will affect its business under existing SEC rules.

Additionally, litigation relating to climate change has increased, both lawsuits seeking damages and to compel action by GHG-emitting companies. Plaintiffs frequently target energy companies or industries with significant GHG-emissions levels, often basing their claims on a public-nuisance theory or an argument that the defendant company contributed to global warming by emitting GHG, thereby creating the conditions that gave rise to a given plaintiff’s injuries. While litigation relating to climate change is not common, its prevalence may increase in the future, particularly as GHG regulation becomes more widespread.

Additionally, some companies face legal pressure directly related to their disclosure practices. In September 2007, New York State Attorney General Andrew Cuomo launched an investigation of five large energy companies—AES, Dominion Resources, Dynegy, Xcel Energy and Peabody Energy—subpoenaing them to produce internal documents relating to their analysis of climate risks and the disclosure of such risks to investors. In letters accompanying the subpoenas, the attorney general questioned whether the companies’ plans to build coal-fired power plants posed undisclosed financial, regulatory and litigation risks that their investors should know about, particularly given that the plants’ main emission, carbon dioxide, has been linked to global warming. In his letter to Xcel Energy, Cuomo cited Xcel’s failure to disclose its projected carbon-dioxide emissions or to thoroughly evaluate the potential impact of future GHG regulation, making it difficult for investors to make informed decisions.

While Attorney General Cuomo has not yet taken action against any of the companies, this investigation could be the first of many in an effort to compel GHG-emitting companies to disclose the potential risks of their businesses to investors. In the near future, the investigation may induce greater voluntary disclosure, as demonstrated by Xcel’s more extensive discussion of climate change risk in its 2007 Form 10-K.

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