On November 19, The AES Corporation (“AES”) entered into a settlement with the Attorney General of the State of New York (“NYAG”) regarding disclosure of climate change risk to investors. This is the third such settlement with the NYAG by a major power company (the other two settling power companies were Xcel Energy and Dynegy). The terms of the NYAG settlements provide a useful roadmap for climate change disclosure, and should be studied carefully by energy, industrial and other companies with significant carbon footprints. In brief summary, the settlement requires each company (on an annual basis) to:
- Analyze material financial risks associated with GHG laws and regulation. This includes:
- identification of current GHG laws and regulations in the states and countries where the companies operate (including the Regional Greenhouse Gas Initiative (RGGI);
- discussion of expected trends in GHG laws and regulations; and
- analysis of the material financial impact (if any) of these laws and regulations on the company’s business.
- Analyze material financial risks from climate change litigation. This includes:
- a description of any climate change litigation involving the company the outcome of which is likely to have a material financial effect; and
- any climate change-related decisions issued by the Supreme Court of the United States, the US Court of Appeals or any court in any jurisdiction in which the company operates, that the company concludes are likely to have a material financial impact on the company’s business.
- Analyze material financial risks from the physical impacts of climate change. This includes material financial risks to the company arising from increases in sea level and changes in weather conditions (such as extreme weather, droughts or water shortages and changes in temperature).
- Analyze strategies to manage climate change risk and GHG emissions. To the extent that the company’s GHG emissions (or the impacts of climate change on company operations) materially impact its financial exposure, the company is required to:
- state its current position on climate change;
- estimate its GHG emissions for the reporting year;
- identify expected GHG emission from new plants that are subject to federal or state permitting;
- include strategies to reduce its climate change risk and adapt to the physical impacts of climate change;
- identify the results of such strategies; and
- address the company’s corporate governance process applicable to climate change issues, including the role of the board of directors and whether officer compensation is based on meeting climate change objectives.
Only a few days after the AES settlement was announced, the NYAG joined a supplemental petition to the Securities and Exchange Commission (SEC) filed by a coalition of institutional investors, asset managers and environmental organizations renewing its call for interpretive guidance on climate risk disclosure. The supplemental petition cites a number of new developments that make the need for national guidance on climate change risk even more compelling than it was when the coalition filed its original petition in 2007. Those developments include:
- Increasing scientific evidence that climate change is happening at a more rapid pace than had previously been predicted;
- Current EPA regulations requiring reporting of greenhouse gas (GHG) emissions;
- The progression of proposed cap and trade legislation through Congress;
- EPA’s proposed finding that GHGs endanger human health and welfare;
- EPA’s proposed “tailoring rule” that would require GHG permitting under the Clean Air Act for large stationary sources; and
- Recent appellate court decisions recognizing standing and federal court jurisdiction over climate change claims.
In a speech before the Corporate Counsel Institute at Northwestern University School of Law on October 9, SEC Commissioner Elisse B. Walter stated:
We are taking a very serious look at our disclosure system in [the climate change] area. Although I’ve stated publicly that we are not an agency populated with climate experts, we are taking affirmative steps to better educate ourselves. I have recently met with a number of experts who analyze the risks and opportunities posed by climate change. Discussions at these meetings have confirmed my belief that climate change is a very serious issue. And I believe that it is time for us to consider issuing interpretive guidance regarding disclosure in this area.
Although Commissioner Walter was speaking for herself and not making an official pronouncement on behalf of the SEC, two working groups have been created within the SEC to study the issue. It appears that the petition filed in 2007 seeking interpretive guidance from the SEC on climate change disclosure is receiving more favorable consideration now than was the case under the prior administration.
- See Jeff Gracer’s article, Disclosure of Climate Change Risk to Investors (pdf) for a fuller discussion of climate change disclosure issues.
