June 8, 2010
Last week, the Environmental Defense Fund (“EDF”) and Kohlberg Kravis Roberts & Co. L.P. (“KKR”), a leading private equity firm, announced that a program to implement environmental best practices at several KKR portfolio companies yielded $160 million in savings over the past two years. KKR’s Green Portfolio Program launched in 2008 in conjunction with EDF’s Green Returns program, an initiative that aims to improve both environmental and business performance in companies owned by private equity firms.
According to EDF, the first eight KKR-owned companies to enroll in the Green Portfolio Program, which include such well-known names as Sealy and HCA, collectively avoided “over $160 million in operating costs, 345,000 metric tons of CO2 emissions, 8,500 tons of paper, and 1.2 million tons of waste.”
EDF reports that the Green Portfolio Program has expanded from its initial eight companies “to include approximately 20 percent of the companies in KKR’s global private equity portfolio.” In addition to its work with KKR, EDF has also collaborated with the Carlyle Group, another major private equity firm, to create an environmental due diligence screening tool which helps to identify opportunities for environmental improvements in prospective portfolio companies.
The recent success of the Green Portfolio Program has implications beyond the involved portfolio companies and their investors at KKR. It suggests that for any business, enlightened environmental management can improve profitability. Private equity firms, in particular, are focusing on sound environmental stewardship as an essential ingredient to the success of their portfolio companies.
For more information about environmental management strategies, contact Jeffrey Gracer.
February 5, 2010
On January 27, 2010, in response to petitions filed by institutional investors and other investor groups, the Securities and Exchange Commission (“SEC”) published an interpretive release to provide greater guidance to public companies regarding the Commission’s existing disclosure requirements as they apply to climate change matters (the “Guidance”).
The SEC’s action follows settlements entered into by the New York State Attorney General’s office with three major power companies mandating more extensive disclosure of climate change risks, and the EPA’s recently-finalized rule mandating a wide array of companies to publicly report their greenhouse gas emissions.
During comments announcing the decision, SEC Chair Mary Schapiro emphasized that the Guidance is not meant create new law, and instead is aimed at providing consistency among corporate climate change disclosures, which have been marked by significant variability in scope and content, even among companies within the same industry.
The Guidance was approved by a 3-2 vote of SEC Commissioners, divided along party lines. Dissenting Commissioners objected to the SEC using its interpretive power to address areas that are not within its competence and expertise. The Guidance also has been heavily criticized by certain Republican members of Congress.
Although the Guidance does not technically create new legal obligations, it does, in practice, advance principles that public companies must carefully consider when updating and revising their environmental disclosures. Although some critics have questioned whether the Guidance will really solve the problem of variability in climate change disclosure due to potentially different interpretations of the materiality standard, it will, at the very least, promote more careful attention to corporate disclosure of climate change issues and very likely drive companies toward more fulsome disclosure.
Many of the key principles articulated in the Guidance reiterate fundamental tenets of good corporate disclosure that the SEC has been applying for years, but when applied specifically to climate change matters, they create a formidable set of challenges for companies making disclosure decisions. For example:
- In determining whether a climate change risk is material, the company should ask whether there is a substantial likelihood that a reasonable investor would consider the information important, and resolve doubts in favor of disclosure;
- Disclosure of a known trend or uncertainty regarding climate change (such as future legislation or regulation) is required unless management determines that it is not reasonably likely to occur or is not material;
- The time horizon of an analysis underlying a disclosure may be relevant to a registrant’s assessment of whether a future trend or uncertainty is reasonably likely to occur or is material; and
- Companies should address, when material, their difficulties in assessing the effect of the amount and timing of uncertain events and provide an indication of the time periods in which resolution of the uncertainties is anticipated.
In light of these uncertainties, companies would be well advised to consider certain core issues as they relate to disclosure of the risks and effects of climate change, including the following potential concerns as they may be relevant and material to a particular company’s business:
- Companies should assess whether they have sufficient disclosure controls and procedures in place to process information pertaining to climate change disclosure;
- Because climate change is a rapidly developing area, companies should regularly assess their potential disclosure obligations in light of new developments;
- Climate change disclosure should consider the material impacts of current and reasonably anticipated future international accords, as well as federal, state, and local laws and regulations;
- Companies should consider the extent to which their plants and operations are subject to current and reasonably anticipated material physical impacts associated with climate change; and
- Companies should consider whether the indirect consequences of climate change regulation will create new material risks or opportunities that could impact their profitability.
It remains to be seen how these principles will be applied, but, taken together, they point toward increased analysis and disclosure of climate change risk by public companies.
December 4, 2009
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.
August 25, 2009
A new report finds that shareholder resolutions on the issue of climate change are increasing in both frequency and success. The report, released by the non-profit groups Ceres and the Interfaith Center on Corporate Responsibility, finds that a record number of 68 climate-related shareholder resolutions were filed during the 2009 proxy season. The report indicates that 31 resolutions were withdrawn in response to the company in question taking affirmative steps on climate. Higher levels of support are being seen in votes on climate-related shareholder resolutions, with 6 resolutions receiving more than 30% of the vote.
One resolution, by shareholders of IDACORP—an Idaho energy company—achieved a majority vote of 51.2%. Following the vote the company is working with a shareholder advisory group on identifying renewable energy pilot projects, and the company promised to adopt greenhouse gas reduction goals, according to the report. The majority vote on the IDACORP resolution marked the first time such a resolution has achieved majority approval.
If the trends identified in the report continue, corporations will increasingly face pressure from shareholder resolutions to take action on the issue of global climate change.
July 29, 2009
On July 10, 2009, the Alaska Electrical Pension Fund (“Fund”) filed a class action in the U.S. District Court for the Southern District of New York against the Kerr-McGee Corporation (“Kerr-McGee”) and several of its officers and directors. (See Complaint, Alaska Electrical Pension Fund v. Kerr-McGee Corp., 2009 Civ. 6220 (S.D.N.Y. July 10, 2009).)
The Fund alleges that Kerr-McGee made false and misleading statements in a public offering incident to the spin-off of Tronox Corporation (“Tronox”), which at the time of the offering was a wholly-owned subsidiary of Kerr-McGee. (Id. at 5.) The registration statement for Tronox stated:
As of September 30, 2005, our financial reserves for all active and inactive sites totaled $239.4 million, $160.6 million of which are classified as noncurrent liabilities. We believe we have reserved adequately for the reasonably estimable costs of known environmental contingencies. However, additional reserves may be required in the future due to the previously noted uncertainties.
The complaint alleges that: (1) Kerr-McGee knew these estimates materially underestimated actual environmental liability because an internal investigation had determined that Tronox’s environmental liabilities were at least $400 million and perhaps as high as $900 million; (2) Kerr-McGee purposefully chose not to reveal these estimates to investors, thereby allowing Kerr-McGee to profit significantly from Tronox’s inflated stock price; and (3) Tronox operated as an independent company for only a short period before earnings losses due to negative environmental assessments caused stock prices to plummet. Tronox filed for bankruptcy in January 2009.
Lawsuits of this type are likely to become more common in tough economic times, as environmental costs contribute (or are perceived to contribute) to declines in stock price. Great care is necessary to accurately disclose environmental risks in public offerings and to make such disclosure consistent with internal assessments so that disclosure cannot be second-guessed with the benefit of 20-20 hindsight.
June 11, 2009
Two reports released on June 3 criticize current disclosure of climate change risk by many public companies and call for specific climate change disclosure guidance from the Securities and Exchange Commission (SEC). Reclaiming Transparency in a Changing Climate: Trends in Climate Risk Disclosure by the S&P 500 from 1995 to the Present (pdf), commissioned by the Center for Energy and Environmental Security, Environmental Defense Fund, and Ceres, analyzed approximately 6,400 10-K filings by S&P 500 companies, in the utilities, energy, materials, industrial, financial, consumer products, and IT & technology sectors. The report found that “there is an alarming pattern of non-disclosure by corporations regarding climate risks” and that: (1) 76.3% of 2008 annual reports filed did not include any mention of climate change; (2) only 5.5% of 2007 annual reports identified at least one risk posed by climate change and articulated a strategy for managing and mitigating that risk; (3) less than 10% of companies in the financial sector discussed climate change in their 10-K filings; and (4) the utilities sector had the highest disclosure rate.
The second report, Climate Risk Disclosure in SEC Filings (pdf), prepared by The Corporate Library, assessed climate risk disclosures in the Quarter 1, 2008 filings of 100 global companies in the electric utilities, coal, oil and gas, transportation, and insurance sectors. The report concluded that most companies failed to discuss their greenhouse gas emissions or their position on climate change in their filings. The utilities sector had the highest ranking, of “fair”, because 3 of the 26 companies studied disclosed the risk climate change posed to their businesses and 2 companies disclosed actions to address climate change.
Both investors and regulators are demanding greater disclosure of climate risks. For example, the Global Framework for Climate Risk Disclosure was developed by investors to encourage standardized reporting from companies. The New York Attorney General subpoenaed five major energy companies in 2007 raising concerns that the companies did not disclose material information about increased climate risks. The subpoenas have resulted in two of the companies entering into settlement agreements with the Attorney General’s Office. (See Jeff Gracer’s article, Disclosure of Climate Change Risk to Investors: A Critical Issue in Search of National Standards (pdf) for information.) Unless and until the SEC issues more specific guidance, the New York State Attorney General’s settlement framework may represent the most complete articulation of factors to be considered in connection with disclosure of climate change risk.
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