Greenhouse gas bill and corporate reporting

Strategic Finance, Jan, 2008 by Stephen Barlas

Look for a major fight to break out in the Senate over the issue of corporate reporting to the SEC on greenhouse gas (GHG) emissions. The Senate Environment & Public Works Committee was expected to clear a bipartisan bill (S. 2191) in December that would go to the floor after Congress returns from the winter recess. Previous GHG emission caps have been considered in prior sessions, but neither the Senate nor House has ever passed a bill. It may be a different story in 2008, however, making the Securities & Exchange Commission's corporate reporting provisions in any bill something to watch. The bill, "America's Climate Security Act," is sponsored by Sens. Joseph Lieberman (I.-Conn.) and John Warner (R.-Va.). It has two separate sections with corporate reporting provisions. The first concerns corporate reports to a new Environmental Protection Agency GHG registry and sets standards to ensure those reports are accurate, including specifying that companies use internal control protocols consistent with federal standards; you can hear a faint echo of Sarbanes-Oxley in that provision. The second section specifically instructs the SEC to issue a regulation within two years under the 1934 Securities Act that requires a public company to report, "based on the current expectations and projections and knowledge of facts," its financial exposure due to its net global warming pollution emissions and the potential economic impacts of global warming on the company's prospects.

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Sen. Robert Menendez (D.-N.J.) has criticized the second provision in S. 2191 for not going far enough, however, and will propose tougher amendments.

The SEC has been silent on the issue of whether corporations need to report risks from GHG emissions, much less how that reporting should be done. In the past, it has addressed reporting for things such as Superfund exposure and Clean Air Act violations, and some companies are voluntarily reporting GHG exposure based on, for example, requirements in Item 103 of Regulation S-K, which dictates reports having to do with legal exposure.

Companies who voluntarily report to the SEC use some of the reporting guidelines produced by groups such as the Global Reporting Initiative, Carbon Disclosure Project, and Ceres, a group representing investors and pension funds. "It is not an exaggeration to say that the climate change disclosure market has largely been privatized," says Jeff Smith, the partner-in-charge of the environmental law practice at Cravath, Swaine & Moore LLP and past chairman of the Committee on Environmental Disclosure of the American Bar Association's Section on Environment, Energy, and Resources. According to Smith, "It would be a mistake, however, to believe that this voluntary activity, no matter how sophisticated and well-intentioned, could become a permanent substitute for mandatory reporting."

In the minds of people like Mindy Lubbers, president of Ceres, the need for mandatory reporting requirements like the ones in the Lieberman/Warner bill is underlined by the low rates of voluntary disclosure of climate risk by the largest companies in three affected industries: petro-chemicals (28%), insurance (19%), and auto manufacturers (26%). Lubbers points out that even within the electric power industry, where exposure to GHG risks is high and a much higher percentage of industry participants voluntarily report, companies do an inadequate job of assessing the risks and opportunities.

On September 18, 2007, Ceres and other groups submitted a petition to the SEC requesting an interpretive release clarifying that material climate-related information must be included in corporate disclosures under existing law. Lubbers says, "It must be emphasized that petitioners do not seek an onerous new disclosure routine." Ceres met with staff in the SEC's division of corporation finance and some of the commissioners during the first week of December.

SEC Speaks on Proxies, Cox Vows to Consider Reversal in 2008

The SEC's decision on November 27 to continue to prevent shareholder groups from having access to corporate proxies for the purpose of electing dissident directors was confusing and possibly temporary. Last spring, the Commission proposed two options: either give shareholders access to the proxy if they met an ownership threshold, or don't give access. Chairman Chris Cox, who voted for both options at the time, was thought to support the "pro-access" position, as did Roel Campos and Annette Nazareth. But Campos left the Commission last summer. Knowing that left only two votes for "pro-access," Cox cast his vote for "anti-access" in late November, joining Commissioners Paul Atkins and Kathleen Casey in a 3-1 vote for "anti-access." But Cox said he voted for the "anti" position because corporations needed some certainty going into the 2008 proxy season. He promised to revisit the issue in 2008, implying his hope for some movement toward greater shareholder access. Nazareth will be gone then, however, and the Bush administration has nominated two replacements for her and Campos. Luis Aguilar, one of the nominees, might side with Atkins and Casey anyway. A corporate lawyer, he has drawn criticism among union representatives and former SEC officials for casting doubt in published interviews on the effectiveness of parts of the 2002 Sarbanes-Oxley law. Unions opposed him.