Climate risk – Acts of God on the books

New York’s state attorney-general, Andrew Cuomo, subpoenaed five power companies in September, aspects of an investigation into whether the companies have properly disclosed the financial risks of CO₂ emissions from new coal-fired power plants.

The case will test whether existing US securities law can be used to force companies to report on the risks associated with climate change, just as they do for other liabilities such as pending legal judgments, pension commitments and executive pay.

In parallel to the attorney-general’s action, investors including public pension funds the California Public Employees’ Retirement System and the California State Teachers’ Retirement System are petitioning the Securities and Exchange Commission to force companies to disclose their likely financial exposure to climate change. The signatories to the petition, which include several environmental groups, say the risks of global warming are “material to shareholder investment decisions and must be disclosed under existing law”.

Previous informal requests to the SEC by investors for mandatory disclosure have gone unanswered, however. So far the SEC has not formally responded to the petition, which demands corporate transparency on the physical risks associated with climate change “that are material to a company’s operation and financial condition”; the financial risks and opportunities associated with present and probable greenhouse gas regulation; and climate-related litigation.

Won’t or can’t?

Despite a doubling in corporate climate change risk reporting in five years, according to a 2006 Friends of the Earth report, many companies seem to be ignoring the calls for greater disclosure.

Supporters of the push for more transparency say some of the most vulnerable companies fail to report on climate change risk or do a poor job of it.

Only five of the 21 members of the US Climate Action Partnership, a corporate lobbying group that supports global warming regulation and cap-and-trade schemes, report climate change risk information in their annual SEC filings, according to the Free Enterprise Education Institute. And 1,100 of the 2,400 companies contacted by the Carbon Disclosure Project, an effort by 315 major shareholders to get companies to voluntarily disclose and reduce their CO₂ emissions, did not even respond.

In a January 2007 report, Ceres and the Calvert Group said more than half of the companies in the Standard & Poor’s 500 stock index were “doing a poor job of disclosing climate change risk”.

Some analysts say that, rather than simply not caring, companies are struggling to determine how to measure the impact of climate change on their businesses. Peter Cohan of Peter S Cohan & Associates, a management consulting and venture capital firm, says putting “a number on the potential costs and business opportunities which climate risk could place in the path of a company” is an “intellectual challenge”.

Rajeev Dhawan, the director of the economic forecasting centre at Georgia State University, says that although companies know that legislation to force reductions in emissions is coming, forecasting exactly how such changes will affect the bottom line is impossible.

AES, one of the power companies subpoenaed by Cuomo, agrees and says it cannot predict whether compliance with potential future US, national, regional and state greenhouse gas reduction programmes will have an impact on its operations or results.

Impossible direction

One observer on a Washington Post blog likened the challenge to having businesses attempt to disclose the shareholder risks of a meteorite impacting the planet or nuclear war. Such events, he argues, constitute “force majeure” and, therefore, outside the realm of financial reporting.

Charles Elson, director of the Weinberg Center for Corporate Governance at the University of Delaware, notes that business may be hesitant because anything in a financial disclosure statement that turns out to be incorrect “winds up to be a potential liability”.

Supporters of the push for more transparent climate risk disclosure, however, say climate change considerations have become a basic fiduciary responsibility for investors.

Peyton Fleming of Ceres says state officials and institutional investors are not pushing for stiffer disclosure requirements because they want to be seen as “green or politically correct”. Instead, he says, it’s a bottom-line business issue that will affect their portfolios in the years ahead.

Simply looking at financial risks under various scenarios is a worthwhile exercise for companies and investors, says Mindy Lubber, president of Ceres, and puts companies on track to mitigating that risk.

Companies are beginning to succumb to the pressure, even without stiffer regulation. Wal-Mart has announced it will begin asking suppliers to measure and reduce their carbon footprints and report their efforts to the Carbon Disclosure Project.

Wal-Mart was rewarded, however, for its voluntary move with a drop in its stock price that analysts said was a result of the announcement of its collaboration with the CDP. Unfortunately, those kinds of “rewards” will mean that companies waiting in the wings to act will be hesitant to do so as long as there is an option.

Useful links:
www.cdproject.net
www.sec.gov
www.ceres.org


Climate change disclosure

The Carbon Disclosure Project surveys large companies in the US and UK to see how they are managing climate change. In the US:

· 56% of the S&P500 responded to the CDP questionnaire (compared with 77% of the FT500).

· More companies said they regarded climate change as a commercial risk than an opportunity.

· Only 29% of survey respondents said they had implemented greenhouse gas reduction programmes with specific targets and timelines (compared with 76% of FT500 respondents).