AES resolves investigation by NY Attorney General Cuomo with agreement to disclose climate-change risks to investors
In his latest use of New York's Martin Act as an environmental enforcement tool, on November 19, 2009, New York Attorney General Andrew M. Cuomo announced an agreement with The AES Corporation requiring AES to disclose material risks associated with climate change in its annual report to the Securities and Exchange Commission. The agreement resolves an investigation that began with Mr. Cuomo’s September 14, 2007 letters and accompanying subpoenas to AES and four other energy companies.
Under the terms of the November 19, 2009 Assurance of Discontinuance Pursuant to Executive Law § 63(15), AES’ disclosures will include an analysis of material financial risks associated with current and probable future greenhouse gas legislation and regulations, as well as material financial risks to the company from the physical impacts of climate change, including “the impact of an increase in sea level and changes in weather conditions.” In addition, AES has agreed to a broad litigation disclosure in which the company will describe any climate-change-related litigation involving AES,
the outcome of which will likely have a material financial effect on the Company and any climate change-related decisions issued by the United States Supreme Court, any United States 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 effect on its business.
The Attorney General previously reached similar agreements with Xcel (see August 26, 2008 Xcel settlement) and Dynegy (see October 23, 2008 Dynegy settlement).
SEC's Division of Corporate Finance revises guidelines for shareholder proposals covering climate risks
On October 27, 2009, the SEC’s Division of Corporate Finance revised its guidelines regarding the grounds on which a public company can exclude from its proxy materials shareholder proposals relating to environmental, financial or health risks, including those seeking disclosure of climate-related risks. Issued as part of Staff Legal Bulletin No. 14E (CF) (“SLB 14E”), the revised guidance seeks to address the Division’s concern that the existing analytical framework may have led to the “unwarranted exclusion” of proposals related to an evaluation of risk – formerly seen as an aspect of ordinary business operations and therefore excludable under Rule 14a-8(i)(7) – but which focus on “significant policy issues.”
Going forward, the Division will examine the “nexus” between the nature of the proposal and the company and whether the proposal’s underlying subject matter “transcends the day-to-day business matters of the company and raises policy issues so significant that it would be appropriate for a shareholder vote.” Where the nexus is sufficient and the proposal raises such policy issues, the proposal generally will not be excludable under Rule 14a-8(i)(7). The Division also highlighted the board of directors’ oversight of corporate risk management, noting that a proposal focusing on the board’s role in overseeing a company’s management of risk may also “transcend the day-to-day business matters” and raise significant policy issues meriting a shareholder vote.
Rule 14a-8 under the Securities Exchange Act of 1934 permits shareholders to submit proposals for inclusion in a public company’s proxy statement, and also describes categories of proposals that a company may exclude from its proxy statement. Rule 14a-8(i)(7), for example, permits a company to exclude a proposal that “deals with a matter relating to the company’s ordinary business operations.” Under the prior guidelines, established in Staff Legal Bulletin No. 14C (CF) (June 28, 2005), where a proposal focused on a company undertaking an internal assessment of risks and liabilities arising from its operations, the Division permitted the company to exclude the proposal under Rule 14a-8(i)(7) as relating to an evaluation of risk, which the Division viewed as relating to the company’s ordinary business operations. Companies were not permitted to exclude proposals, on the other hand, focused on minimizing or eliminating operations that could adversely affect the environment or the public’s health.
Shareholder and environmental activists have hailed the new guidelines as a victory. Mindy Lubber, president of Ceres, a coalition of institutional investors and environmentalists, praised the guidelines for “strik[ing] the right balance of ensuring that resolutions about critical matters reach company shareowners, without opening the floodgates to proposals of more questionable significance.” Ceres and the Ceres-coordinated Investor Network on Climate Risk (“INCR”) have actively campaigned for the guideline change announced in SLB 14E; in a June 14, 2006 letter to then-SEC Chairman Christopher Cox, for example, INCR renewed earlier requests by INCR investors that SEC staff revise its interpretation of Rule 14a-8’s “ordinary business” exclusion to require inclusion of proposals seeking disclosure of financial risks due to climate change.
Climate change and corporate responsibility: are there long-term financial incentives for environmental reform?
The Canadian Institute of Chartered Accountants (“CICA”), through its Risk Management and Governance Board, has commissioned a briefing entitled “Climate Change Briefing: Questions for Directors to Ask”. The stated purpose is to “increase awareness among Canadian directors about the business impacts and related governance issues resulting from climate change.” The result is a guide that focuses on business strategy, risk management, and structure.
The briefing addresses five major areas for director improvement: understanding of business issues; influence on risk management and strategy; impact on financial performance; external communications and disclosures; and the adequacy of information systems and internal controls. For each of the sections, the briefing provides relevant questions for directors to ask themselves regarding their business.
One area that warrants emphasis is the idea that, for businesses that are faring poorly in the current economy, cutting back is not necessarily the answer. In fact, scaling back environmental reforms in the short run may lead to larger costs in the long run. Therefore, the CICA advocates investing now in changes such as waste reduction and energy efficiency. The thought is that these changes will lead to greater performance and shareholder value in the future.
The briefing also discusses business response to government regulations. The CICA notes that government regulations put “a price on carbon,” so businesses must ensure reliability of information such as greenhouse gas emissions. The briefing describes “adaptation” and “mitigation” measures, the latter of which requires management to reduce greenhouse gas emissions that are attributable to its products. This issue of tracking the climate impact of particular products most recently came to light when Wal-Mart announced its “sustainable products index” initiative, which requires suppliers to provide information about the environmental impacts of their products.
The CICA briefing recognizes that climate change creates reputational and financial issues for businesses, and is “inextricably linked” to concerns such as shareholder value. The briefing is geared toward maintaining the support of “corporate stakeholders,” which range from investors to customers, communities, and governments. However, it is impossible to predict when companies can expect to see the success of forward-looking investments. Therefore, businesses are going to have to balance surviving the economic downturn and the risk of investing in future success.
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.
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."
