Climate disclosure, focusing on measuring financial risks and opportunities 1

Posted by Brad Johnson Wed, 31 Oct 2007 18:30:00 GMT

Committee page

Witnesses
  • Dr. Gary Yohe, Professor of Economics, Wesleyan University
  • Mr. Jeffery Smith, Partner in Charge of Environmental Practice, Cravath, Swaine, and Moore
  • Ms. Mindy Lubber, President, Ceres
  • Mr. Russell Read, Chief Investment Officer, California Public Employees’ Retirement System

Financial Week:

Senate Banking Committee takes up corporate disclosure of financial risk from climate change By Nicholas Rummell October 31, 2007

Several leading Democrats on the Senate Banking Committee say they want to push for greater disclosure from companies about the financial risk they face from climate change.

The move by Democrats is largely the by-product of a petition sent to the Securities and Exchange Commission last month. That petition requested that the SEC require companies to spell out material losses from climate change, such as the impact of new fuel regulations on automakers.

According to the petitioners, who include regulators in 11 states as well as institutional investors and advocacy groups, companies are currently required to delineate such risks under accounting rules, but they often fail to meet those requirements because of poor regulatory guidance. Business groups often argue that such information is confidential.

A Banking Committee hearing on the topic late last month was sparsely attended, by only Democratic members, but it shows congressional interest in the financial risks argument. Sen. Robert Casey (D-Pa.) said he thinks the federal government should act to “chart a new course” for stopping climate change and improving financial returns for companies, which he called “two ends of a problem.”

A bill being marked up in another Senate committee reportedly would require new SEC regulations to require public companies to inform shareholders about financial disclosure of and economic impact of global warming on the company. The bill, sponsored by Sens. Joseph Lieberman (I-Conn.) and John Warner (R-Va.), places caps on carbon emissions.

Current climate change disclosures are inconsistent, which makes it difficult for investors to compare one company’s disclosure with others, said Russell Read, chief investment officer at the $259 billion California Public Employees’ Retirement System. Mr. Read said the SEC currently can require greater disclosure, but that it probably needs “prodding” by Congress to do so.

Some feel additional disclosure would lead to more inconsistent filings. Gary Yohe, an economics professor at Wesleyan University, said that, depending on whether a company evaluates risk to customers or the entire social cost of carbon use, “you get a wide range of numbers.”

Such guidance should focus only on companies that would be significantly impacted by climate change. “It would be a mistake for everyone to say something,” said Jeffrey Smith, lead partner in the environmental practice at law firm Cravath Swaine & Moore. Flooding the market with insignificant disclosure would hurt investors, he said, noting that companies should be “poised” to address useful information in filings. “Fake numbers are bad.”

Mindy Lubber, president of environmental advocacy group Ceres, testified that insurers face quantifiable financial risks from prolonged droughts and wildfires, energy companies face climate-change litigation and other companies face risk from greenhouse gas regulations. She cited recent investment bank research reports as evidence that Wall Street is starting to pay attention to the costs attributed to climate change.

Ms. Lubber said the petitioners don’t want “an onerous new disclosure regime,” but rather to tighten up current accounting standards on physical risks that can be evaluated, such as litigation or losses due to hurricanes. Petitioners in recent years have repeatedly asked the SEC to issue guidance, but the SEC has ignored such requests, she said.

The clamor for financial disclosure related to climate change has also made for strange bedfellows. Steven Milloy and Thomas Borelli, climate change skeptics and mutual fund managing partners, filed a petition for rule-making with the SEC earlier this month. They want companies to have to disclose the business risks of laws and regulations that address global warming.

The two activists, critical of the global warming movement and attempts at regulation, found that of 21 corporate members of the U.S. Climate Action Partnership, only five disclosed that global warming regulation is a business risk. USCAP is a group of 33 companies and environmental groups that calls for significant reductions in greenhouse gases. “USCAP members,” Messrs. Milloy and Borelli wrote in their petition, “are keeping shareholders in the dark.”

Case in point, the two say, is the impact on General Electric’s labor force of the proposed shift to compact fluorescent light bulbs from incandescent bulbs. GE manufactures the environmentally friendly compact bulbs in China, which has caused friction with the company’s U.S. employees. The petition also targets PepsiCo, Du Pont and Caterpillar—also members of USCAP—for not disclosing financial risks adequately, as well as Wal-Mart, which is not a member.

“Global warming regulation represents a serious risk to publicly owned corporations, yet this threat to corporate earnings and shareholder value is not being disclosed to shareholders,” the petition stated.

According to Ms. Lubber and supporters, companies actually could reap benefits by addressing climate change. One analysis cited by Ms. Lubber found that U.S. electric power companies that have not prepared for the future cost of carbon regulations could see losses in earnings of up to 17%. Conversely, the same analysis found that companies with less polluting fuel mixes could see earnings increase by as much as 15%, she said.

The SEC has not issued a response on either petition and is not required to do so, though staffers may review them.

Environmental proxy proposals seeking more data on financial risk from global warming have come into vogue (see “Green Proxies to Be Red Hot This Season,” FW, Oct. 29). Last year, environmental activist shareholders filed a record-breaking number of green proposals; even more are planned for the 2008 season.