Power Companies to Disclose Financial Risks of Climate Change
Amy Miller (Corporate Counsel), Law.Com, December 30, 2008
For years, environmental and shareholder activists have pushed companies that generate greenhouse gases to disclose how climate change could affect their financial outlook. Now, two operators of coal-burning power plants -- Xcel Energy, Inc., and Dynegy Inc. -- have agreed to provide this information in their 10-K filings with the Securities and Exchange Commission.
It wasn't the SEC that demanded the information, but New York State attorney general Andrew Cuomo. Since September 2007, he's been investigating five companies that plan to build new coal-fired plants around the country. Cuomo claimed jurisdiction under the Martin Act, a New York law that allows his office to bring civil or criminal charges against anyone who sells or buys securities in the state.
Minneapolis-based Xcel settled with Cuomo in August, and Houston-based Dynegy followed in October. They agreed to warn investors about the financial risks that they could face because of climate change, including how their expenses could rise due to future legislation, regulation or litigation related to greenhouse gas emissions.
"I hope and expect that other companies will follow the lead of Dynegy and Xcel," Cuomo said at an October press conference in which he appeared with former vice president Al Gore. At press time Cuomo's office was still investigating The AES Corp. and Dominion Resources Inc., both based in Virginia, and St. Louis-based Peabody Energy Corp.
Xcel, for one, says that it isn't bothered by the new disclosure obligations. "We think this is a positive thing for our investors," says general counsel Michael Connelly. "They're going to see how the company is anticipating and managing these risks." According to Connelly, Xcel plans to reduce its greenhouse gas emissions by retiring old power plants and generating more renewable energy. (Dynegy general counsel J. Kevin Blodgett declined to comment for this article.)
Experts say the settlements could create a new standard for environmental risk reporting. Businesses that don't provide the same disclosures won't just seem out-of-date to their investors, says Peter Fontaine, a former Environmental Protection Agency lawyer who now co-chairs the climate change practice group at Cozen O'Connor. Reticent companies could also be accused in shareholder suits of providing incomplete or misleading information to the SEC.
"This is a very significant development," Fontaine says. "It could really modify corporate behavior in a way that many people are not thinking about right now."
Activists have previously used shareholder resolutions to force companies to report climate change risks in their SEC filings. Cuomo had a more powerful weapon with the Martin Act, a broad antifraud law dating from 1921 that former New York attorney general Eliot Spitzer deployed frequently and effectively in probes of the financial and insurance industries.
Neither Cuomo's office nor the SEC would comment for this story. But Linda Griggs, a former SEC lawyer now at Morgan, Lewis & Bockius, says that the settlements are consistent with the agency's existing rules on disclosure of material financial risks. Xcel and Dynegy just agreed to provide more information about potential climate-change problems. "It's a level of specificity," Griggs says.
The agreements require Xcel and Dynegy to disclose information not typically reported to the SEC, such as future carbon emissions from their planned coal-fired plants. The companies also agree to disclose management plans to reduce emissions and corporate governance actions tied to climate change, such as whether executive compensation is linked to environmental performance.
Xcel's Connelly says that his company settled because it was already publicly disclosing the information that Cuomo wanted to see, just not in its SEC filings. "From our perspective, we thought we did a good job on our disclosure," Connelly says.
Working with outside counsel from Baker Botts, Xcel's in-house lawyers compiled publicly available information about the company's environmental impact. That included Xcel's response to a 2006 questionnaire from the Carbon Disclosure Project, a London-based nonprofit group that collects and publishes data about greenhouse gas emissions. Xcel also gave Cuomo the information that it filed with the Colorado Public Utilities Commission for a proposed coal-fired power plant in that state.
The settlements do raise some important concerns, attorneys say. Disclosures will likely be vague because it's impossible to know exactly what will happen in the future-not just what laws and regulations might be enacted, but how the earth's climate might actually change.
Statements should be based on fact and science, not speculation, says Brinkley Dickerson, a securities and corporate governance partner at Troutman Sanders. "Companies should be called upon to disclose what they know and not guess about the future," Dickerson says. "If you require them to guess about the future, they could be wrong, and that could lead to exposure under the securities laws."
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