Recent actions by investors and the New York State Attorney General are pressuring companies to disclose their greenhouse gas emissions and the risks they face from climate change. Many regard such information as essential to investors' right to know about the potential liabilities facing thousands of industries as the climate warms and new emissions regulations become a near certainty.

Numerous industries face high risks from the environmental changes already resulting from greenhouse gas emissions. Companies tied to industrial agriculture, for example, face financial risks from increased droughts, more frequent and severe floods, and the rising costs of fossil fuel-based inputs like synthetic fertilizer and pesticides.

Investors Demand More Disclosure

On Oct. 22, the Investor Network on Climate Risk (INCR) sent a letter to the Securities and Exchange Commission (SEC) requesting the agency require greater disclosure of the climate change risks that businesses face. The INCR letter was sent in response to an SEC request for public comment on its 21st Century Disclosure Initiative, which proposes to modernize the current SEC disclosure system. The 14 signatories to the letter include institutional investors such as California's Public Employees' Retirement System (CalPERS) and the California State Teachers Retirement System (CalSTRS), and the Maryland, New Jersey, New York City, and New York State public pension funds or treasurers.

The signatories found that "significant material risks exist" to the companies in their portfolios because of climate change, triggering a need for disclosure on SEC filings. According to Nancy Kopp, the Maryland State Treasurer, "Action by the SEC to require disclosure of climate risks — as well as additional environmental, social and governance risks — would result in better, more informed decisions for investors."

"What we seek is not radical, but rooted in the SEC's duty to follow the most fundamental investor protection principle there is: the right to know," said California State Treasurer Bill Lockyer.

The INCR is a network of institutional investors and financial institutions overseeing more than $7 trillion in assets, according to the group's website. The INCR is a project of Boston-based Ceres, a national coalition of investors, environmental organizations, and other public interest groups. Ceres works with companies and investors to address sustainability challenges such as global climate change.

Attorney General Subpoenas Corporate Climate Change Data

On Oct. 23, the day after the INCR letter, New York State Attorney General Andrew Cuomo announced that, in response to a subpoena issued by his office, a large energy company had agreed to voluntarily disclose information about its climate risks, including its annual greenhouse gas emissions. Dynegy, a Texas-based company operating coal, oil, and natural gas power plants, was one of five large energy companies the attorney general subpoenaed in the fall of 2007 to investigate whether investors were informed about the financial risks of operating the plants. Another energy company, Xcel Energy, agreed in August to disclose its climate risks.

"Investors have the right to know all the material financial risks faced by coal-fired power plants associated with global warming," Cuomo said in a statement. The attorney general was joined in his announcement by former Vice President Al Gore.

Dynegy and Xcel Energy have agreed to disclose analyses of their material risks from present and future climate change regulations, litigation, and the physical impacts of climate change. Additionally, they will report current carbon emissions, projected increases in emissions from their coal-burning plants, and strategies for managing the emissions. The attorney general last year petitioned the SEC to require such disclosures in securities filings.

Future Climate Change Disclosures

These actions by the New York Attorney General and by investors represent a growing interest in evaluating and disclosing the risks businesses will face when greenhouse gases are eventually regulated, as well as the financial risks to industries impacted by the physical changes wrought by climate change. If a price is imposed on greenhouse gas emissions, as is likely under several regulatory proposals, emitters, especially energy producers, would be hit by increasing costs to continue polluting. The greater the emissions, the greater the potential financial risk to investors.

The disclosures sought by the investors and the attorney general would also help to prepare businesses for reporting to an eventual registry of greenhouse gas emissions. Before any cap-and-trade program or other regulations can be instituted, there must be a thorough accounting of how much companies are emitting. Currently, businesses may report their emissions to the Carbon Disclosure Project or to the Climate Registry, two nonprofit organizations that collect mostly voluntary reports from states and businesses on their greenhouse gas emissions.

Though no mandatory national government registry exists, the Department of Energy manages the Voluntary Reporting of Greenhouse Gases Program. Also, in December 2007, Congress required the U.S. Environmental Protection Agency (EPA) to propose a reporting rule for industrial plants and other large sources of greenhouse gases. The EPA missed the Sept. 26 deadline and has yet to comply with the law.