Landmark Agreement - Publicly Traded Energy Company Agrees to Disclose Financial Risks Related to Climate Change

Update

09.19.2008

As the public becomes increasingly concerned about climate change and greenhouse gas regulation, publicly traded companies are considering the extent to which they need to disclose climate change risks in their annual securities filings with the Securities and Exchange Commission.

Recently, New York Attorney General Andrew Cuomo reached a landmark agreement with a large energy company, Xcel Energy Inc., which requires detailed disclosure of the company's financial risks from climate change in its SEC reports. The agreement followed subpoenas issued to Xcel and four other energy companies to determine whether each company's plans to build coal-fired power plants posed new financial risks to investors that were not fully disclosed.

This Update provides a summary of the Xcel agreement and offers practical guidance.

The Xcel Agreement

The Xcel agreement is the first enforceable agreement compelling a public company to disclose the financial impacts of climate change and greenhouse gas regulation on its business. The agreement is also significant because it was the result of the New York attorney general's action, not an initiative of the SEC, which may indicate a trend in state-by-state activism on this issue. Cuomo is still negotiating with the four other energy companies.

Disclosure Requirements. The agreement requires Xcel to analyze and disclose the financial risks:

from greenhouse gas regulation, including identifying current legislation and regulations in states and countries where Xcel operates and discussing expected future trends in legislation and regulation;
from litigation related to climate change involving Xcel, and the impact of any judicial decision related to climate change that would have a material financial effect on its business; and
to Xcel's operations due to the physical impacts of climate change, including changes in weather conditions, temperature and sea level.

The agreement also provides that to the extent Xcel's greenhouse gas emissions materially affect its financial exposure from climate change risk, Xcel will disclose:

a statement of its current position on climate change;
the company's estimated greenhouse gas emissions for the reporting year, expected increases in greenhouse gas emissions, and strategies to reduce climate change risk and to adapt to the physical impacts of climate change; and
corporate governance actions concerning climate change, including the role of its board of directors and whether environmental performance is incorporated into officer compensation.

Background on Disclosure Requirements and Recent Developments

Background on SEC Climate Change Disclosure Requirements. The Securities Act of 1933 and the Securities Exchange Act of 1934 require publicly traded companies to disclose all material facts necessary for investors to make informed investment decisions. Under this disclosure regime, climate change-related disclosure may be required in a company's SEC reports. For instance, Item 101 of Regulation S-K under the Securities Act (which implements important provisions of the federal securities laws described above) requires disclosure of the material effects that compliance with environmental laws may have on capital expenditures, earnings or a company's competitive position. Item 103 of Regulation S-K requires disclosure of material legal proceedings, which would include environmental matters. Item 303 of Regulation S-K, Management's Discussion and Analysis of Financial Condition and Results of Operations, requires disclosure of known trends, uncertainties or events that will or are likely to materially affect a company's operations. Finally, Item 503 of Regulation S-K, which are related to risk factors, requires a discussion of significant factors, including environmental factors, that make an investment speculative or risky.

Recent Developments. To date, the SEC has not issued guidance interpreting its disclosure rules with respect to climate change. However, recent developments indicate that investors are concerned about the impacts of climate change on public companies and are seeking more comprehensive disclosure. In September 2007, a coalition of institutional investors, major environmental groups and state treasurers submitted a petition to the SEC requesting that the SEC issue interpretive guidance on climate risk disclosure under existing law. In June 2008 this coalition supplemented its petition to the SEC with new evidence and asked for immediate action. In addition, during the 2008 proxy season, fifty-seven shareholder proposals were submitted to U.S. companies seeking commitments to reduce emissions and more extensive disclosure of the impacts of climate change. Twenty-six additional proposals were submitted to request sustainability reports to investors, including information about managing climate risk.

Practical Tip

Companies Should Evaluate Their Existing Climate Change Disclosure. The Xcel agreement sets a new precedent for public company disclosure. However, without interpretative guidance from the SEC, it remains difficult to determine whether and how a company should disclose its potential risks from climate change and greenhouse gas regulation. Companies should anticipate that more extensive disclosure of the impact of climate change will be required and prepare by performing an in-depth analysis of the possible effects of climate change on their business financial condition, including future capital requirements, results and prospects.

Additional Information

This Update provides only a general summary of the Xcel agreement. You can read the full text of the Xcel agreement at the New York Attorney General's website. You can find discussions of other recent cases, laws, regulations and rule proposals of interest to public companies on our website.