Tag Archives: carbon disclosure

Legal Community Begins to Weigh in on SEC Interpretive Guidance

Now that SEC’s Interpretive Guidance has been published, legal experts are beginning to comment publicly about the Guidance, its meaning and implementation.  The legal analyses generally agree that publicly-traded companies will need to significantly change their current environmental risk assessment practices and/or should look to outside experts on risk assessment techniques.

Some of these comments were recently published in an article in Law.com.  Excerpts from that article are below:

Jane Kroesche, head of the West Coast environmental transactions practice at Skadden, Arps, Slate, Meagher & Flom:

… meeting the new requirements will not just be a matter of “plugging language” into the business discussion or legal proceedings section, where companies usually make environmental disclosures.

“It is a very broad-reaching guidance.  It’s important for companies to understand that it’s not just about disclosing the impact from emissions regulations. It goes way beyond that.”

Robert O’Connor, head of the clean tech practice at Wilson Sonsini Goodrich & Rosati:

… the challenge for corporations under these new guidelines will be twofold. Companies must have the infrastructure in place to know whether there is something to disclose. And, they must find out if they are responsible for carbon emissions along their whole supply chain, or just some of it.

“It is very early. For many companies, it will not rise to the level of materiality, but I do think that all companies need to ask the question, ‘Do I have the procedures and systems in place to know one way or the other?’”

Other leading firms have issued client alerts on the SEC’s action.

King & Spalding stated

… companies should ensure that they have sufficient controls and procedures in place to process relevant information. Most companies in the energy and insurance industries have in-house professionals that are well versed in climate change related issues and will be able to quickly make an assessment of whether additional disclosure is required in light of the guidance. However, the guidance could impact companies in a range of industries, some of which may not have regularly monitored these issues in the past. All companies should consider whether additional in-house training or periodic consultation with outside advisors is advisable to supplement existing controls.

McDermott Will & Emery made the following comments:

Under previous SEC guidance… known trends and other uncertain events do not need to be disclosed if they are not reasonably likely to come to fruition.  However, if management cannot make that determination, disclosure is required unless management determines that the occurrence of such known trend or other uncertain event would not be reasonably likely to have a material impact on the registrant’s financial condition or operations.  Registrants should also address in the MD&A, when material, the difficulties involved in assessing the effect of the amount and timing of uncertain events, and provide where possible an indication of the time periods in which resolution of the uncertainties is anticipated.

Elm is unique in our risk assessment experience and capabilities.  We have conducted environmental risk assessments in the past that included detailed reviews of climate risk exposures that are aligned with the SEC’s new guidance.  Please contact us with questions about how we can assist you.

Dark Clouds on the Climate Horizon

In 2009, there was a general sense in the US that some regulatory and economic certainty would finally be established relative to greenhouse gases, and CO2 in particular.  The current administration made highly public moves and statements to that effect, which were mirrored by action in Congress and the Senate.  EPA issued its finding of endangerment.  And there was significant optimism that the COP15 Copenhagen meeting would bear fruit.

Fast forward to February 2010.  There has been quite a shift in direction and now there is arguably more business risk related to CO2/GHG than there was going into 2009.  Among recent highlights:

  • Nike formally announced that they are abandoning the use of carbon offsets and Renewable Energy Certificates (RECs), citing, among other concerns:

there is substantial scrutiny of the use of RECs, in particular related to whether they in fact help create new renewable power, or whether they are simply payment to a project that would have existed anyway. … Moving forward, however, our preference is to achieve climate neutrality through a combination of energy efficiency and the purchase of more direct forms of renewable energy, through on-site applications and other means.

  • The German Emissions Trading Authority (DEHSt) computer system was hacked and fraudulent European Union carbon allowance transactions were completed.  Read a report here.
  • Europol, the European law enforcement agency, reported on December 9, 2009 that

the European Union (EU) Emission Trading System (ETS) has been the victim of fraudulent traders in the past 18 months. This resulted in losses of approximately 5 billion euros for several national tax revenues.

As an immediate measure to prevent further losses France, the Netherlands, the UK and most recently Spain, have all changed their taxation rules on these transactions. After these measures were taken, the market volume in the aforementioned countries dropped by up to 90 percent.

  • The Copenhagen meeting failed to achieve the concrete results that had been expected.
  • The accuracy and veracity of data published by key climate scientists was called into question, creating the “Climategate” scandal.
  • The UK government published a report supporting a fixed price or auction reserve on carbon emissions over the current market-driven cap and trade.
  • National-level climate bills in the US are no longer getting the support they enjoyed in 2009.  Read more.
  • Arizona declined to participate in a regional GHG trading program, citing the difficult economy.

However, in contrast to the overarching trend, the US did see two important developments.  First, EPA promulgated its CO2 emissions reporting regulation in October 2009, which is effective calendar year 2010.  Second, SEC issued Interpretive Guidance on the inclusion of climate risks in financial disclosures.

There continues to be significant  uncertainty related to the financial value/risk of climate-related activities.  And that is not likely to change in the near future.

NGOs Win Court Battle Against Ex-Im Bank, OPIC on Project Financing

According to EnvironmentalLeader.com,

San Francisco’s federal court settled a lawsuit in which environmental groups and four U.S. cities accused the Export-Import Bank of the United States, the country’s official export-credit agency, and the Overseas Private Investment Corp., of financing energy projects overseas without considering impacts on global warming, Santa Monica Daily Press reports.

Friends of the Earth, Greenpeace, Boulder, Colorado. and the California cities of Arcata, Oakland and Santa Monica, filed the lawsuit in 2002, claiming that “the two agencies provided more than $32 billion in financing and loan guarantees for fossil fuel projects over 10 years without studying their impact on global warming or the environment as required by the National Environmental Policy Act,” FoxReno.com reports. The cities claimed they would feel the environmental impacts of overseas projects.

The two agencies have agreed to provide a combined $500 million in financing for renewable energy projects and take into account GHG emissions associated with projects each company supports.

Under the settlement, Ex-Im agreed to develop a greenhouse gas policy and start considering CO2 emissions when evaluating fossil fuel projects for investment.

OPIC agreed to reduce the GHG emissions associated with projects it supports by 20 percent over the next 10 years.

The Santa Monica Daily Press, also covering the court decision, clarified

The projects at the center of the lawsuit included a coal-fired power plant in China; a pipeline from Chad to Cameroon; and oil and natural gas projects in Russia, Mexico, Venezuela and Indonesia. Many of the projects are well under way or already completed and provided oil to the U.S.

SEC Votes to Require Public Disclosure of Financial Risk of Climate Change

The Securities and Exchange Commission (SEC) today voted to require public companies to disclose the financial risks they face related to climate change.

In her opening remarks, SEC Chairman Mary Shapiro emphasized that

we are not opining on whether the world’s climate is changing; at what pace it might be changing; or due to what causes. Nothing that the Commission does today should be construed as weighing in on those topics.

The Commission is also not considering amending well-defined rules concerning public company reporting obligations, nor redefining long-standing interpretations of materiality.

The vote requires that the SEC develop and issue an “interpretive release” – guidance that can help public companies in determining what does and does not need to be disclosed under existing rules.

Specifically, the SEC’s interpretative guidance highlights the following areas as examples of where climate change may trigger disclosure requirements:

  • 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.
  • 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.
  • 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.
  • Physical Impacts of Climate Change: Companies should also evaluate for disclosure purposes the actual and potential material impacts of environmental matters on their business.

Although the Commission ultimately voted in favor of the mandate, The NYT reported that Commissioner Kathleen L. Casey said it made little sense to issue such guidance “at a time when the state of the science, law and policy relating to climate change appear to be increasingly in flux.”

The SEC’s interpretive release will be posted on the SEC Web site as soon as possible.

Once the guidance is available, companies will need to review and evaluate the current risk assessment and reporting framework to determine if it is robust enough to comply with the new SEC action.  With our substantial experience with EHS risk assessment and management that extends well beyond basic regulatory compliance, Elm is uniquely suited to assist companies with this.  Please feel free to contact us to discuss further.

SEC to Consider Corporate Disclosure on Climate Risk

The Securities and Exchange Commission will hold an Open Meeting on January 27, 2010 at 10:00 a.m.  At the meeting, the SEC will consider two agenda items, the second of which is a recommendation to publish an interpretive release to provide guidance to public companies regarding the Commission’s current disclosure requirements concerning matters relating to climate change.

See the official announcement here.

Will SEC Heed $500 Billion?

Under current SEC regulations, companies are required to disclose material information or information that an investor should posses in order to decide whether to buy a company’s stock.  But these companies do not routinely include climate-related risks in their filings, nor is the information consistent when it is provided at all.

The California Public Employees Retirement System, which manages $202 billion of assets, and the California State Teachers’ Retirement System, which manages $130 billion of assets, are among 20 investors and groups that petitioned the U.S. Securities and Exchange Commission to issue guidance telling companies to include risks related to climate change in their quarterly and annual filings.

“The SEC should strengthen and enforce its current requirements so investors’ decisions fully account for climate change’s financial effects,” Calpers Chief Executive Anne Stausboll said in a statement.

The initiative hopes to make the most out of the Obama administration’s renewed emphasis on environmental protection, climate change rhetoric and plans to propose an emissions reduction target at the December climate change conference in Copenhagen.

SEC Commissioner Elisse Walter, one of five members who makes decisions on federal securities rules, has said she believes that climate change is a very serious issue and this is the time for the SEC to issue so-called ‘interpretive guidance’ on this topic.

“This (petition) will be taken seriously and be one more piece of influence on the commission, to perhaps get bit more instructive on considering these issues,” said David Martin, a former SEC director of corporation finance — the division in charge of overseeing corporate disclosures. Martin is now in private practice at law firm Covington & Burling.

Debate Over Bolivia Carbon Project Spotlights Risks

The New York Times published an article highlighting questions surrounding a major forest preservation project in Bolivia sponsored by American Electric Power, BP and PacifiCorp, known the Noel Kempff Climate Action Project.

Greenpeace claims it found that from 1997 to 2009, the estimated reductions from the program had plummeted by 90 percent, to 5.8 million metric tons of carbon dioxide, down from 55 million tons. It also questioned the “additionality” of the program, which says that a specific forest area would not have been preserved without the program.

What is striking about this matter is not the debate of the project’s effectiveness (given the on-going controversy surrounding the use of forestry in climate risk management).  The surprise was a comment made by Glenn Hurowitz, a director of Avoided Deforestation Partners, a small nonprofit organization that claims to “advance the adoption of U.S. and international climate policies that include effective, transparent, and equitable market and non-market incentives to reduce tropical deforestation”:

In the proposed climate legislation, you can’t get credit for conservation or any other type of offsets until you’ve delivered the offsets. So inaccurate projections would not affect the issuance of credits.

This statement clearly demonstrates a critical business risk in using forestry for carbon management.

While “inaccurate projections” may not impact the issuance of credits, the sequestration calculations/projects have a significant impact on the upfront project support and financing.

It is reasonable to foresee that a failure of forestry to deliver on its projections will have a severely negative impact on the perception of forestry projects as a financially successful and viable carbon risk management tool.

As with any business investment, financial analyses are based on projections about what an investment will deliver in terms relevant to the investment.  In the case of forestry projects, calculations are completed to determine the amount of carbon that is projected to be absorbed and therefore generate the amount of credits/offsets.  These offsets create a financial return in terms of both cost avoidance and potentially revenue.  Financial analyses may be completed for different carbon management options and an investment is made in accordance with the option judged to be the “best” as defined by the criteria applied by the investor.

So what happens if the projections are inaccurate?  Sure, some offsets will likely be delivered by the project.  But will the investment deliver the anticipated return?  Will a shortfall trigger the need for pollution control investments and/or non-compliance penalties?

There continues to be a critical need to reduce risk in forestry-based carbon management investment.  As we have discussed before, it is advisable to take a deep dive into to uptake calculation methodologies, delivery milestones and scenario planning in advance of such investments.