Risk Management

Battles Brew over Climate Risk Disclosure

With Exxon Mobil and Peabody Energy in the crosshairs over their lack of disclosure, how much exposure do other companies face?
David McCannApril 8, 2016
Battles Brew over Climate Risk Disclosure

Pressure is building on companies to disclose more information about their climate-related risks, but it remains to be seen whether such calls will actually pose a burden for more than a handful of isolated companies.

Since a landmark Supreme Court decision in 2007, which held that greenhouse gas emissions from automobiles pollute the air and that the Environmental Protection Agency must therefore regulate such emissions, the number of climate change-related lawsuits against public companies has been growing.

Recent years also have brought a growing number of governmental actions and shareholder lawsuits against companies, or their directors and officers, alleging environmental-related disclosure failures.

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But for the most part, these actions have not charged companies specifically with climate change-related disclosure inadequacies, notes William Passannante, co-chair of the insurance recovery practice at law firm Anderson Kill.

In a high-profile exception, New York’s Attorney General, Eric Schneiderman, last November launched an investigation into whether Exxon Mobil misled the public and investors about the risks of climate change and their potential impact on the oil industry.

As reported by The New York Times, the inquiry in part is looking into the company’s funding of outside groups that worked to dispute climate science, even as in-house scientists were describing the possible consequences of climate change.

There were several developments related to that news late last month. On March 22, the Securities and Exchange Commission ruled that Exxon Mobil must allow its shareholders to vote on a climate change resolution as part of the company’s annual proxy. If the proposed resolution is approved, Exxon would have to detail specific risks of climate change, or climate change-related legislation, that could negatively impact its profitability.

The following day, a major charity, the Rockefeller Family Fund, announced that it would dispose of its holdings in Exxon as part of a plan to divest all investments in fossil fuels companies as quickly as possible. It was a startling statement, considering that John D. Rockefeller, Sr. co-founded Standard Oil Co., an Exxon predecessor company, from which the Rockefeller family derived most of its wealth.

On March 29, attorneys general from Massachusetts and the U.S. Virgin Islands said they would join in the New York investigation.

Also back in November, Schneiderman announced its finding that Peabody Energy, the world’s largest publicly traded coal company, “violated New York laws prohibiting false and misleading conduct in the company’s statements to the public and investors regarding financial risks associated with climate change and potential regulatory responses.”

Peabody agreed to file revised shareholder disclosures with the SEC, affirming that “concerns about the environmental impacts of coal combustion … could significantly affect demand for our products or our securities.”

Does Two Make a Trend?

But are these cases one-offs — or, as it were, two-offs? Or at least, will we see such actions anywhere but New York, where the attorney general is given extraordinary powers and discretion in fighting financial fraud?

“The reason you’re seeing these actions in New York is because of the unique characteristics of the Martin Act,” says Lindene Patton, an attorney, independent consultant, and former Zurich Insurance executive with long experience in the area of climate change risk.

Specifically, there is no scienter requirement under the Martin Act, meaning a defendant doesn’t have to have intent or knowledge of wrongdoing in order to be found liable for financial fraud.

But there is a potential for additional litigation, says Passannante: “There haven’t been lots of lawsuits hanging their hat on the SEC’s guidance [on climate change-related disclosure issued in 2010]. But when a state attorney general says the kind of things in a press release that were said about Peabody Energy, it makes you pause and wonder whether these sorts of subpoenas and settlements are going to happen to companies in other industries.”

Industries based on fossil fuels like oil and coal are clearly the most at risk of regulatory impacts on their business related to climate change, while manufacturers and utilities also bear significant risk.

Yet in the risk factors section of its 10-K filings over the past several years, Exxon “has simply cut and pasted the same, rather generic 100-word statement on its potential risk from climate regulations, offering scant data at a time when there have been significant developments,” says Dylan Tanner, executive director of InfluenceMap, a U.K.-based nonprofit that analyzes the extent to which companies influence climate policy and legislation.

Here is that 100-word statement:

Climate change and greenhouse gas restrictions. Due to concern over the risk of climate change, a number of countries have adopted, or are considering the adoption of, regulatory frameworks to reduce greenhouse gas emissions. These include adoption of cap and trade regimes, carbon taxes, restrictive permitting, increased efficiency standards, and incentives or mandates for renewable energy. These requirements could make our products more expensive, lengthen project implementation times, and reduce demand for hydrocarbons, as well as shift hydrocarbon demand toward relatively lower-carbon sources such as natural gas. Current and pending greenhouse gas regulations may also increase our compliance costs, such as for monitoring or sequestering emissions.”

Tanner compares that to disclosures made by Philip Morris. The company “offers two or three pages of detailed regulatory and litigation risks facing its sole product, cigarettes,” he says. “I would class climate regulatory risk for Exxon to be of a similar magnitude as tobacco-health regulations for Philip Morris.”

Rankings as of April 7

Rankings as of April 7

InfluenceMap grades 122 companies on the degree to which they are supportive or obstructive on a range of climate policies, from the acceptance of climate science to support for specific legislation that may advance solutions to climate change. As of April 7, eight of the 12 lowest-ranked companies were in the energy business (see chart).

But with regard to disclosure specifically, it’s not just energy companies that are falling short. In a November 2015 report, InfluenceMap looked at climate change disclosures of the 20 largest publicly traded U.S. companies in their 2012, 2013, and 2014 10-K filings and found that a majority of them reported limited or no information.

The report was especially critical of Boeing, General Electric, and Procter & Gamble, none of which made any mention of climate risk. GE, it notes, “has extensive manufacturing facilities and exposure to energy markets that are impacted by climate change.” And P&G “made no mention of the risk that climate change poses to [its] supply chain,” despite having more than 130 manufacturing facilities in 40 countries.

Among those three companies, Boeing and GE again did not mention climate risk in their 2015 annual reports, while P&G has a June 30 fiscal year-end.

InfluenceMap’s report contrasted those companies with Coca-Cola, which it said “identifies numerous strands of risks to its operations.”

Coca-Cola “detailed how increasing global temperatures due to climate change could decrease agricultural activity and limit the availability of important sources of ingredients in its products,” the report said. “Coca-Cola further explained how climate change-exacerbated water scarcity could impair bottling and production facilities, and that increased extreme weather could disrupt its supply chain.”

The kind of undisclosed risks that InfluenceMap ascribed to GE and P&G haven’t gotten them in legal trouble to date, but there’s no guarantee about the future. “A company that has exposures in its supply chain, factories, or operations, and isn’t doing anything about them, could face shareholder lawsuits,” he says. “And what you usually see in those is an after-the-fact, second-guessing game about what you didn’t do or what you disclosed or didn’t disclose.”

Enforcement Outage

Meanwhile, although the SEC has put guidance on the table about climate risk disclosure, so far there has been barely any enforcement activity.

Ceres, the nonprofit sustainability advocate, issued a report in 2014 noting that the SEC issued 49 comment letters to companies in 2010 and 2011 that addressed the adequacy of climate change disclosure. But there were only three such letters in 2012 and none in 2013, according to the report.

“Since then, if anything, the SEC has done even less to improve disclosure,” says Jim Coburn, a senior manager at the organization who co-authored the report. “It’s hard for the SEC to investigate every issue that might be material that a company may not be saying enough about, but we definitely think they should be prioritizing this issue more. Without enforcement of the guidelines, most companies are not going to say enough in their filings.”

While the SEC dawdles, the Financial Stability Board, formed in 2009 to coordinate the development of regulatory and other financial-sector policies to promote global financial stability, is taking on climate risk disclosure.

The board announced in December the establishment of a task force to study the matter, chaired by Bloomberg LP boss and former New York City Mayor Michael Bloomberg. Graeme Pitkethly, CFO of Unilever, a company that InfluenceMap ranks highly, is the group’s vice chair.

But while disclosure may help investors with decision-making, how much can it be expected to move the needle in the more important search for solutions to climate change?

“If companies are just disclosing the risks and opportunities they face and don’t have plans to reduce emissions, support public policy, and develop new products,” says Coburn, “then disclosure in and of itself is not that useful.”

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