SEC Issues Climate Change Disclosure Guidance - Not a Statement Regarding Climate Change "Facts"
On January 27, 2010 the Security Exchange Commission (SEC) announced it had voted approval to issue “interpretative guidance” on the existing disclosure requirements as they apply to business and legal developments relating to climate change. The SEC stressed in its announcement that: 1) the interpretive guidance is meant to provide clarity and enhance disclosure consistency; 2) the commission is not making any statement regarding the facts relating to climate change, global warming, pace of warming, or causes; and that 3) it is not changing reporting, and materiality rules. That said, the Commission’s vote was split along “party lines” among the agency's republican and democratic commissioners. Kathleen Casey reportedly criticized the SEC vote as "transparently political and such a breathtaking waste of the commission's resources."
The origin of the Commission’s guidance goes back to September 18, 2007, when a coalition that included state officials having regulatory, enforcement, and fiscal management responsibilities, alongside institutional and asset management firms and conservation groups, petitioned the Commission for the guidance. In its petition, the coalition reviewed current law for disclosure of climate risks, the climate-related risks faced by publicly traded companies, the importance of disclosure to investors, the inadequacy of current SEC filings and voluntary disclosures, and the reasons why the Commission should clarify corporate disclosure obligations. The coalition subsequently supplemented its petition filing on June 28, 2008, informing the Commission of events including: the passage of the Energy Independence and Security Act (2007); the passage of the Consolidated Appropriations Act which funded USEPA to develop a rule requiring reporting of GHG emissions above certain thresholds; proposed legislation (Lieberman Warner Climate Security Act of 2007); the initiation of various state and regional actions, and the increase in climate-related litigation cases among others. In light of these developments, the coalition requested the Commission to expedite the issuance of the guidance.
With the SEC’s announcement, it stated that the guidance provides examples where companies should make climate change related disclosure based on the impact of: 1) pending and promulgated US legislation and regulation; 2) passage of international accords and treaties; 3) identification of risks and opportunities resulting from legal, technological, political and scientific developments; and 4) climate-related environmental impacts (e.g. sea-level rise, increase storm and flooding etc.) on their business. As of this blog post, the Commission has not posted the guidance on its website and stated that it will be posted “as soon as possible.” Stay tuned.
Ceres reports that insurers want to be part of the climate change solution
In April 2009, Ceres published a report entitled “From Risk to Opportunity, Insurer Responses to Climate Change.” The report contains responses and significant information from over 12 insurance companies, as well as several brokers, insurance consultants, insurance associations regarding the climate initiatives being undertaken by the industry, including coverage for green buildings, renewable energy, carbon risk management, and officers’ liability insurance to tackle climate change and rising weather-related losses in the US. The report speaks to the many insurer activities identified in our previous blog post regarding insurance industry climate change strategy and its implications for corporate policy holders, as well as the more recent March 17, 2009 National Association of Insurance Commissioners (NAIC) climate risk disclosure requirement for insurance companies. The insurance industry’s response aims to address more than $200 billion in estimated losses to the global economy attributed to climate change, but critics say the industry’s response is too little, too late.
The Ceres report identifies 643 specific insurance industry climate activities in the areas of:
- Developing “innovative” insurance products;
- Disclosing carbon risk;
- Aligning terms and conditions with risk reducing behavior and promoting loss prevention;
- Promoting understanding and participation in Climate change and public policy;
- Offering carbon risk management and offsets; and
- Investing in and financing climate change solutions and customer improvements.
What does the Ceres Report say about Insurers and Policy Holder Litigation?
Interestingly enough the report states that “liability insurers might willingly assume the responsibility for climate-related litigation costs borne by their policyholders (p.1).” The report goes on to state that losses arising from the causes/impacts of climate change, as well as the emerging responses, will pierce liability lines. Potential triggers for insurer responsibility include:
- Abrupt impacts of extreme events linked to climate change;
- Gradual impacts such as increased mold losses from warmer and wetter climates and flooding (Lavoie 2006);
- Secondary consequences of climate-linked events (e.g. waste spills);
- Failure to adapt quickly or adequately to climate change impacts;
- Demands for compensation for prudent adaption costs;
- Political risks;
- Poor corporate governance and failure to fulfill fiduciary duties in light of climate change risks and opportunities;
- Professional liability associated with implementation of new technologies;
- Contract performance in carbon-offset or energy production/saving projects, and carbon credit nondelivery;
- False advertising (greenwashing);
- Disinformation/fraud;
- Inadequate fiduciary responsibility (investment choices)
- Worsening roadway risks affecting vehicle liability losses.
The report acknowledges that insurers in the past have “assumed certain risks for which they did not collect adequate underwriting information or, premiums, or have adequate surplus.” The report recommends that insurers involving climate-related risks will “need to be attentive to changing standards of care, as new data, methodologies, and technologies emerge.
Insurance companies required to disclose climate change risks - will disclosure facilitate risk mitigation, climate change regulation, or litigation?
Co-authored with John Wyckoff.
On March 17, 2009, the National Association of Insurance Commissioners (NAIC), an organization composed of the chief insurance regulatory officials of the 50 states, the District of Columbia and five US territories, adopted the requirement that insurance companies having in excess of $500 million in premiums disclose to regulators and the public the financial risks they face from climate change, as well as their response actions taken to address these risks, by May 1, 2010. Those companies with premiums in excess of $300 million are required to report a year later and those with lower premiums may voluntarily report at any time. The NAIC believes that insurer disclosures will allow regulators to understand the impact of climate change on insurance (property, casualty, life, and health) including its availability, affordability, and solvency.
The adoption of this requirement by the NAIC confirms the growing interest in financial threats to the business community from climate change liability. As noted on prior blog entries, claims alleging damages from “greenhouse gas” emissions are expected to proliferate in the wake of the United States Supreme Court’s April 2007 ruling in Massachusetts v. US Environmental Protection Agency 127 S.Ct. 1438 (2007), that greenhouse gases are air pollutants under the federal Clean Air Act and states have standing to sue. Indeed, there already are a number of lawsuits being pursued by various State Attorney Generals against power companies and automobile manufacturers, alleging that greenhouse gas emissions from their activities and products contribute to global warming and harm the states’ environment, economies and citizens. See California v. GMC C06-05755 MJJ, 2007 U.S. Dist. LEXIS 68547 (N.D. Cal. Sept. 17, 2007).
What Others Are Saying About the Disclosure Requirements
Following the adoption of this requirement by the NAIC, the Wall Street Journal reported that, “[e]nvironmental activists wanted insurers to have to disclose specific information about how their businesses might be threatened by climate change, said Andrew Logan, director of the insurance program at Ceres, a Boston-based environmental group involved in the talks. The activists believe such disclosures will help them press their case in Washington for a tough federal cap on carbon emissions.”
The same article went on to report that, “[s]ome carriers aren’t happy with the regulators’ decision. David Kodama, director of policy analysis for the Property Casualty Insurers Association of America, which represents more than 1,000 insurance companies, said his group is concerned that insurers that provide climate-risk information could face lawsuits alleging that their information isn’t detailed enough.”
What Are the Disclosure Requirements?
With respect to the particulars of the disclosure, the NAIC developed the Insurer Climate Risk Disclosure Survey to assist regulators in assessing an insurer’s risk assessment and management efforts. The Climate Risk Disclosure Survey requires that insurers answer eight questions in good faith, but that the insurers are not required to provide information that is “immaterial to an assessment of financial soundness,” and they are not required to provide quantitative information, and commercially sensitive, proprietary, or forward looking information. The Survey requests information regarding climate change and the company’s: 1) plans for assessing, reducing or mitigating its emissions; 2) policy for risk and investment management; 3) process for identifying climate change-related risks and business impacts; 4) current and anticipated climate change risks; 5) investment strategy response to climate change impacts; 6) steps to encourage policy holders to reduce losses caused by climate change-influenced events; 7) steps to engage key constituencies on climate change, and 8) action to manage climate change risks including the use of computer modeling. These disclosures should provide good insights to risks insurance companies are insuring as more businesses face liability from environmental events such as floods, tropical storms, and the like.
Looking Forward to More Disclosure
Given that disclosure is “right around the corner” and the intertwined relationship between insurance companies and policyholders, investors, and regulators, it is likely that all of these parties will be evaluating the new disclosure requirements and its impact on risk mitigation, regulation, and litigation.
New York AG uses Martin Act to reach climate-risk disclosure agreement with Xcel Energy
In an August 27, 2008 press release, the Office of New York State Attorney General Andrew M. Cuomo announced an agreement with Xcel Energy, one of the country’s largest owners of coal-fired power plants, that would require Xcel to disclose to investors the financial risks posed by global warming. According to an August 27, 2008 New York Times article, the agreement is “the first of its kind in the country" and "could open a broad new front in efforts by environmental groups to pressure the energy industry into reducing emissions of greenhouse gases that contribute to global warming.” (The terms of the agreement can be found in the Assurance of Discontinuance Pursuant to Executive Law § 63(15).)
The Xcel agreement traces its roots back to Attorney General Cuomo’s September 14, 2007 letter to Xcel and accompanying subpoena seeking information about Xcel’s analyses of its climate risks and its disclosures of those risks to investors. At that time, Attorney General Cuomo also sent similar letters and subpoenas to four other U.S. energy companies -- AES Corporation, Dominion Resources, Dynegy Inc., and Peabody Energy -- and the August 27, 2008 press release notes that the "Attorney General’s investigation of the remaining companies is ongoing."
The agreement with Xcel results from the New York Attorney General’s use of New York’s Martin Act as an environmental enforcement tool. Using this tool, the Attorney General claims jurisdiction over any company that issues securities on Wall Street. As the New York Times explained:
The agreement represents another novel use by Mr. Cuomo of the Martin Act, a powerful tool that allows the attorney general to bring criminal as well as civil charges. Mr. Cuomo’s predecessor, Eliot Spitzer, used the law to vastly expand the office’s investigations of suspected Wall Street malfeasance.
Now Mr. Cuomo has turned it into a de facto form of environmental enforcement, too. For energy companies, including those based far from New York, he is able to claim jurisdiction because they issue securities on Wall Street.
Climate risk disclosure requirements: Senate Appropriations Committee seeks guidance from SEC
Investors, legislators and others continue their efforts to require that publicly-traded companies enhance their disclosure of material business risks posed by climate change. In one of the most recent examples, the Senate Appropriations Committee’s July 14, 2008 report on the 2009 Financial Services and General Government Appropriations Bill (S. 3260) included language calling on the Securities and Exchange Commission to provide guidance on the appropriate disclosure of climate risk:
The Committee is aware that a petition was filed with the Commission on September 18, 2007, calling for the issuance of an interpretative release clarifying the application of existing law to the disclosure of risks associated with climate change. The Commission is encouraged to give prompt consideration to this petition and to provide guidance on the appropriate disclosure of climate risk.
Report at 108.
The Senate Appropriation Committee’s request to the SEC is set against a backdrop of several years of efforts to expand climate and other environmental risk disclosure obligations. Among the developments in the last 12 months:
- The New York Times reported in a September 16, 2007 article that on September 14, 2007, the New York Attorney General’s office subpoenaed carbon emission information from five of the nation’s largest energy companies, AES Corporation, Dominion Resources, Xcel Energy, Dynegy and Peabody Energy. The subpoenas were accompanied by letters from the New York AG's office expressing concerns that the energy companies had not adequately disclosed to investors the financial risks related to their carbon dioxide emissions.
- On September 18, 2007, a group of state pension funds and institutional investors collectively representing over $1.5 trillion in assets under management joined with environmental groups to petition the SEC to clarify that existing law requires a company to disclose material climate change-related risks to the company’s business. (Public comments on the rulemaking petition are available at SEC File No. 4-547.)
- In a December 6, 2007 letter to SEC Chairman Christopher Cox, Senator Christopher Dodd (Chairman of the Senate Banking, Housing and Urban Affairs Committee) and Senator Jack Reed (Chairman of the Subcommittee on Securities, Insurance and Investment) reported on an October 31, 2007 Committee hearing on “Climate Disclosure: Measuring Financial Risks and Opportunities”. The letter requested that the SEC issue an interpretive release to clarify a registrant’s obligations to disclose climate change-related risks.
- A May 21, 2008 press release from California State Senator Dean Florez announced the approaching California Senate vote on Senate Bill 1550, “Corporations: Climate Risk Disclosure,” introduced by Sen. Florez. According to the press release,
Efforts to get the Securities and Exchange Commission to establish a set of guidelines institutional investors can use to evaluate the environmental policies of companies they put money into have been unsuccessful. Through this measure, California is now looking to lead the nation in encouraging more environmentally responsible investments.
According to a statement released on May 22, 2008 by Ceres, a coalition of investors, environmental groups and other public interest organizations, S.B. 1550 "was approved on the floor of the California State Senate today and now moves to the California Assembly for consideration."
