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April 16, 2004
Thirteen Pension Funds Call on SEC to Require Disclosure on Climate Change Risk
by William Baue
Institutional investors ask the Securities and Exchange Commission to issue a clarification that
climate change is a material risk which must be disclosed in filings.
First question: is climate change reasonably likely to occur? (The Intergovernmental Panel on
Climate Change (IPCC), the official international
body charged with reviewing the scientific evidence on climate change, certainly thinks so.)
Second question: is it reasonably likely to have a material effect on companies' liquidity, capital
resources, or results of operations? Such is the two-pronged test to determine if certain risks
require disclosure under Item 303 of US Securities and
Exchange Commission (SEC) Regulation S-K, or
Management's Discussion and Analysis of Financial Condition and Results of Operations
A group of 13 public pension funds managing over $800 billion in assets believes
that many companies are not fulfilling their duty to disclose the material financial risks
associated with climate change in their MD&As. The group is sending a letter to SEC Chair William Donaldson asking
him to clarify that climate change is indeed a material risk requiring disclosure on security
filings. Yesterday, at the Coalition for Environmentally Responsible Economies (CERES) Annual Conference, the group made public its plea.
"As you know, the existing regulatory framework requires companies to disclose material
risks, including environmental risks, that may diminish shareholder value," the letter to Mr.
Donaldson reads. "The need to incorporate climate risk into standard corporate disclosure
practices grows increasingly urgent, as recent evidence suggests that in certain sectors the cost
of climate change to shareholder value can represent as much as 15 percent of the total market
capitalization of major companies."
"Therefore, investors would like to see the SEC issue
clarification on disclosure of climate risk information," continued the letter sent by members of
the group, which consists of eight state treasurers and comptrollers, four labor fund leaders, and
the New York City comptroller. Ten of the group members belong to the Investor Network for Climate
Risk (INCR), which formed in the wake of the
Institutional Investor Summit on Climate Risk that took place at the United Nations headquarters in
New York City in November 2003.
The SEC routinely issues clarification notices when rules
with wide latitude for interpretation need to be reigned in and more clearly defined.
are calling upon SEC Chairman William Donaldson to eliminate any doubt that publicly traded
companies should be disclosing the financial risks of global warming in their security filings,"
said Mindy Lubber, executive director of CERES. "It is our opinion that that is already
required--it is also our opinion it that is not happening."
A recent CERES report on 20 companies with
significant greenhouse gas (GHG) emissions finds that eight made no mention of climate change in
their 2001 10-K or 20-F filings. Therefore these companies either believe that climate change is
not reasonably likely to occur, which seems an untenable position, or they believe that climate
change does not pose a material financial risk to them. This position, too, seems untenable for
oil companies such as ChevronTexaco (ticker: CVX) or ExxonMobil (XOM), as the burning
of fossil fuels emits significant amounts of carbon dioxide, the primary GHG linked to climate
Treasurer Denise Nappier cites the counter example of American Electric Power (AEP), which recently
met the terms of a shareowner resolution asking for a report on the potential impacts of climate
change and plans to mitigate these risks.
"When you have American Electric Power and other
companies recognizing their fiduciary duty to assess and disclose their environmental risk exposure
to shareholders, then we have to ask: shouldn't the SEC also be recognizing this responsibility?"
she asked. "Shareholders should not have to struggle company-by-company to get the level of
analysis and disclosure we need."
Maine State Treasurer Dale McCormick
points out that MD&A rules do not stop at disclosure, but also require companies to provide
in-depth analysis of the risks.
"Companies with high emissions are even telling us those
emissions are going to cost them--but that's about all they say," said Ms. McCormick. "If we don't
make this standard operating procedure, then you don't get the analysis going and you don't get
information that is very useful--either for company management or for the investors--and most
importantly, you don't get the change that protects the value of retirement funds."
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