1. SECURITIES LAW IMPLICATIONS -- OVERVIEW

Presently, securities disclosure requirements drive the need for the assessments. Companies will be challenged to make consistent disclosures to the Climate Registry or other voluntary reporting organizations, and to report emissions or other climate data in particular state, local or international jurisdictions. In addition, disclosures throughout the SEC filing should be consistent with the Company's website, other public statements and "road show" presentations to investors.

A. Disclosure controls: The SEC's 2010 climate release restated the SEC's views of disclosure controls and specifically tied disclosure controls to climate disclosures.

(1) Identifying known material trends and uncertainties.

In identifying, discussing and analyzing known material trends and uncertainties, registrants are expected to consider all relevant information even if that information is not required to be disclosed, and, as with any other disclosure judgments, they should consider whether they have sufficient disclosure controls and procedures to process this information.

(2) Certifications of SEC filings.

A Company's principal executive officer and principal financial officer must make certifications regarding the maintenance and effectiveness of disclosure controls and procedures.

(3) Timely communication and reporting of information

"Disclosure controls and procedures" are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is (1) "recorded, processed, summarized and reported, within the time periods specified in the Commission's rules and forms," and (2) "accumulated and communicated to the company's management ... as appropriate to allow timely decisions regarding required disclosure."

(4) Information to assess potential disclosures.

The SEC's interpretive release states that a company's disclosure controls and procedures should not be limited to disclosure specifically required, but should also ensure timely collection and evaluation of "information potentially subject to [required] disclosure," "information that is relevant to an assessment of the need to disclose developments and risks that pertain to the [company's] businesses," and "information that must be evaluated in the context of the disclosure requirement of Exchange Act Rule 12b-20 [regarding material omissions].

B. Disclosure committee and CEO/CFO certifications:

For a Form 10-K or 10-Q, comments of outside counsel will usually be presented to the Company's disclosure committee for review, and may also be given to the auditors and to the CEO and CFO for purposes of their certifications. For a registration statement, comments of outside counsel will be provided to the full working group (executives, counsel, auditors and underwriters).

C. General background of Company's SEC filings

(1) Previous filings:

To locate previous filings of the Company or its peer group companies, go to sec.gov and click on "Search for Company Filings." sec.gov/edgar/searchedgar/webusers.htm.

(2) Precedent and peer comparisons:

Compare climate disclosure and risk factors with "peer companies" and other companies in the same industry and locations

(3) Business:

The Business section of the Form 10-K describes industry and locations; look for geographic summary and business segments to determine climate regulations that may apply (e.g., Kyoto Protocol for a company with a segment in Canada).

(4) Properties:

The Properties section of the Form 10-K follows the Business section and identifies the Company's properties that may be subject to regulation and monitoring. The location of properties will also indicate the particular authorities that may have jurisdiction over the Company's operations (e.g., application of Kyoto Protocol).

(5) Financial Statements:

The financial statements in the Form 10-K and 10-Q describe legal proceedings and material contingencies.

D. SEC interpretive release

In January 2010, the SEC issued an interpretive release setting forth the SEC's interpretative guidance on climate change disclosures.1 The interpretive release does not adopt any new rules but establishes the SEC's position that existing rules require significant disclosure of the impact of climate on a public company. According to the release, existing rules may require disclosure regarding risk factors, legal proceedings, business description, and management's discussion and analysis (including discussion of "known trends and uncertainties" related to climate).

(1) Impact of Legislation and Regulation.

When assessing potential disclosure obligations, a company should consider whether the impact of certain existing laws and regulations regarding climate change is material. In certain circumstances, a company should also evaluate the potential impact of pending legislation and regulation related to this topic.

(2) Impact of International Accords.

A company should consider, and disclose when material, the risks or effects on its business of international accords and treaties relating to climate change.

(3) Indirect Consequences of Regulation or Business Trends.

Legal, technological, political and scientific developments regarding climate change may create new opportunities or risks for companies. For instance, a company may face decreased demand for goods that produce significant greenhouse gas emissions or increased demand for goods that result in lower emissions than competing products. As such, a company should consider, for disclosure purposes, the actual or potential indirect consequences it may face due to climate change related regulatory or business trends.

(4) Physical Impacts of Climate Change.

Companies should also evaluate for disclosure purposes the actual and potential material impacts of environmental matters on their business. Physical impacts should take into account the type and location of the company's properties (see 10-K section on properties). Disclosures will reflect the company's geographical footprint (e.g., a company with assets concentrated in coastal regions should consider disclosure of potential physical impacts of climate) and reporting segments (e.g., a company with a Canadian segment will include disclosure about the Kyoto Protocol).

E. Specific disclosure requirements

According to the SEC release, the following provisions under Regulation S-K require the issuer to disclose material climate change risks and effects. Examples of disclosure below reflect the requirements from the terms of Xcel Energy's settlement agreement with the State of New York (2007). Xcel's settlement required the Company to disclose in its Form 10-K the expected impact of climate change and the regulation of greenhouse gas ("GHG") emissions on its operations and financial condition.

The same disclosure requirements apply to public offerings, whether the Form 10-K and 10-Qs are incorporated by reference in a registration statement or the disclosures are actually included in the registration statement for an initial public offering (IPO) or unseasoned public company.

(1) Description of Business (Item 101) – focus on business, customers and competition.

In the Business section of Form 10-K or registration statement, the issuer must report the material effects of complying with federal, state or local provisions regulating environmental protection on the issuer and describe its customers and competitive position. Additionally, the Company should identify future laws or trends in legislation that could have a material effect on operations.

(2) Legal Proceedings (Item 103) – focus on effects of litigation and governmental proceedings.

SEC rules require the Company to disclose material legal proceedings, including those relating to environmental protection having a material financial effect on the issuer. Specific disclosures must be made of any environmental proceeding that is material, involve a damages claim for more than 10% of the current assets of the Company, or potentially involves more than $100,000 in sanctions and a governmental authority is a party.

(a) Example - Xcel Settlement.

Xcel must disclose climate change decisions decided by the Supreme Court, U.S. Appeals Courts, or any court having jurisdiction.

(3) Management's Discussion and Analysis ("MD&A," Item 303) – focus on financial impacts, costs and liquidity.

The MD&A section requires the Company to disclose known trends or uncertainties that the issuer believes will result or likely result in material changes to the Company's financial position, results of operations or cash flows, as well as liquidity, net sales, revenues or income from operations. Disclosures must include contractual obligations and capital expenditures.

(a) Example - Xcel Settlement.

If Xcel's GHG emissions could materially affect its financial exposure, further detail is required in the following areas: (1) company position on climate change; (2) emissions management strategy, including estimated GHG emissions for the year, efforts to offset or limit GHG emissions and adapting to the physical impact of climate change; and (3) the effect of such strategies on future GHG emissions.

(4) Risk Factors (Item 503(c)) – covers forward-looking statements in SEC filing, and discloses risks that current results will not be indicative of future performance.

Risk factors should be both general and specific, stating the broad risk as well as actual instances when regulations are in effect or could be adopted that would have a material adverse effect on the Company's results of operations, competitive position, assets or other aspects of its business. Risk factors should clearly state the risk and must not include "mitigating factors." Risk factors should be specific to the Company and industry, not generally applicable to all public companies.

(a) Example - Xcel Settlement.

Xcel must include financial risks resulting from climate change, including those stemming from physical impacts associated with climate change such as increasing sea level and changes in weather conditions, changes in precipitation, water shortages or changes in temperature.

2. SEC IMPLICATIONS F.

Historical Background

The SEC initially released interpretive guidance regarding the disclosure of material environmental issues in the 1970s. Final rules were adopted in 1982.2 Cases elucidating materiality standards for disclosure were decided in the late 1970s and 1980s.3 In 2004, the Government Accountability Office (GAO) filed a report regarding environmental disclosures in SEC filings.4 Since that time Coalition for Environmentally Responsible Economies (CERES) and several other investor groups, as well as the New York Attorney General, have been working to bring attention to environmental disclosures, particularly those related to climate change.

G. Investor Groups & Timeline

Within the investing community, there was much confusion over the practical considerations of climate change, perhaps as a result of the influx of recent data. Various investor groups, businesses and governments began to offer some sort of structure, though not always consolidated.

(1) Global Framework for Climate Risk Disclosure In Oct. 2006., a group of fourteen leading institutional investors and other organizations released the "Global Framework for Climate Risk Disclosure," outlining necessary aspects of disclosure for assessment of corporate climate risk and opportunities. The report focused on:

  • GHG emissions data, including total historical and projected data;
  • Corporate policies and governance structures that relate to climate change;
  • Physical risks a company faces to its corporate facilities or operations arising from climate change; and
  • Analysis of risks the company faces from GHG legislation.

(2) CERES

In January 2007, a study was commissioned by CERES and Calvert, from David Gardiner & Associates. CERES determined a study was needed as it had made a finding that:

  • Many companies engage in some disclosure, but often, the disclosure is inconsistent and inadequate;
  • Industries that are known to be at high risk for climate change or from regulation of GHGs are making inconsistent and inadequate disclosures;
  • On average, companies in the S&P 500 are providing only 25% of the information that is stated as being necessary in the Global Framework for Climate Risk Disclosure (Oct. 2006) supported by CalPERS; and,
  • In many cases, companies provide no climate risk information in their SEC periodic reporting on Forms 10-K and 10-Q.

(3) Stakeholder Coaltion

In Sept. 2007, a coalition of state officials, environmental advocates, and investors managing over $1.5 trillion in assets petitioned the SEC for clarification of climate disclosure under existing securities regulation.5

(4) CalPERS

In April 2008, CalPERS, the largest public pension fund in U.S., adopted a set of corporate governance standards that require companies it invests in to disclose their financial risks from global warming. Later in June 2008, the Coalition supplemented their petition from 2007 with evidence of recent developments regarding climate change.6

(5) Investors SEC Petition

In October 2008, a group of fourteen large institutional investors and asset managers petitioned the SEC to improve and provide specific guidance on climate risk disclosure in SEC filings. The letter also urged the SEC to address a broader range of environmental, social, and governance (ESG) issues in disclosure requirements.7

In 2008, CERES reported, that during the proxy season, a record of 57 climaterelated shareholder resolutions were filed with U.S. companies. About half were withdrawn after the companies agreed to positive climate-related commitments.8 In 2009, 68 shareholders resolutions filed on climate change.

(6) CERES Sector Report In June 2009, CERES issued an analysis of 10K reporting by oil and gas, insurance, coal transportation and electric power companies.9 CERES rated the disclosures and determined that most companies did not reach a level of "fair", most including some of our clients, were rated as having "poor" disclosures or "none."10

In February 2010, CERES issued a benchmarking study on 100 companies working at reporting on water risks. It focused on the following sectors: beverage, chemicals, electric power, food, homebuilding, mining, oil and gas, and semiconductor. It was determined that most companies are making basic disclosures on water use and scarcity risks. Mining and beverage companies were highlighted as being in the forefront.11

(7) New York State Attorney General

In September 2007, NYS Attorney General Andrew Cuomo issued subpoenas to five energy companies under the Martin Act requiring them to turn over information and documentation relating to internal analyses of their climate change risks. Under the Martin Act, the Attorney General may prosecute a company for fraudulent practices under a "material misrepresentation" or "material omission" standard. Under that standard, the AG does not need to prove the traditional elements of a fraud action (i.e. intent and reliance), but only needs to show a misrepresentation of a material fact. Information is considered "material" if there is a substantial likelihood that disclosure of the omitted facts could have caused a reasonable investor to change their vote.

(a) Subpoenas were issued against: Xcel Energy, AES Corporation, Dominion Resources, Dynegy, and Peabody Energy alleging that disclosure to investors was (i) incomplete and misleading; and, (ii) failed to account for "likely regulatory initiatives" from state carbon emission controls, potential EPA regulations, and federal global warming legislation.

(b) In August and October 2008, Xcel and Dynegy respectively reached settlements with the N.Y. Attorney General. Each company agreed to provide more detailed climate change disclosure in their future SEC Annual Reports including:

  • Financial Risks from Regulation. Material financial risks to the company associated with present and probable legislation and regulations relating to GHG emissions;
  • Financial Risks from Litigation. Any material climate change litigation involving the company as well as any decisions relating to climate change issued by the U.S. Supreme Court, any U.S. Court of Appeals or any court in any jurisdiction in which the company operates that may have a material financial effect on its business;
  • Financial Risks from Physical Impacts. The material financial risks to the company's operations from the physical impacts associated with climate change, such as changes in sea level, weather precipitation and temperature; and
  • Strategic Analysis of Risk. To the extent the company's GHG emission materially affect its financial exposure from climate risk, the company's current position on climate change, certain GHG emissions data, strategies to reduce climate change risks and the results of those strategies and corporate governance measures related to climate change.

Footnotes

1 See sec.gov/rules/interp/2010/33-9106.pdf.

2 Release No. 33-6383 (March 3, 1982) [47 FR 11380]

3 See TRSC Industries, Inc. v Northway, Inc. 426 U.S. 438 (1976) and Basic, Inc. v. Levinson 485 U.S. 224 (1988).

4 GAO report

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9 CERES 10k

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11 CERES water

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