Double-Edged Sword

A loosely knit coalition of state leaders and environmental activists petitioned the Securities and Exchange Commission (SEC) in late 2007 for interpretive guidance on the corporate obligation to disclose material information about all aspects of climate change. The petitioners received what they asked for and a little bit more.

Total Transparency Is the Rule

Open markets must be transparent in order to operate efficiently. Corporate officers, under SEC regulations, are required to disclose material information about the management and operation of a corporation so shareholders can make rational investment decisions. In 2007 a coalition of institutional investors plus state treasurers, attorneys general, and environmental groups — including such notables as the California Public Employees’ Retirement System, Environmental Defense Fund, and New York State Attorney General Andrew Cuomo — filed a petition with the SEC to clarify what information related to the risk of climate change a corporation must divulge in SEC filings. The petition states these new findings "trigger the obligation for companies to assess and disclose material emissions data and their analysis of climate risks and opportunities."

On January 27 the SEC voted to provide the guidance that the petitioners requested, and more. The SEC occasionally provides non – legally binding guidance to companies on how to interpret the disclosure rules in the interest of consistent reporting in SEC disclosures on specific topics. In general, the SEC guidance on reporting the corporate risks of climate change should "cover a company’s risk factors, business description, legal proceedings, and management discussion and analysis." That guidance seems quite reasonable and allows a corporation to make a reasonable assessment based on its view of the risks.

SEC Chairman Mary Schapiro showed remarkable insight when issuing the guidance by removing the political gamesmanship from the process. "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," said Schapiro. "Today’s guidance will help to ensure that our disclosure rules are consistently applied."

Unintended Consequences

Tom Borelli, director of the National Center for Public Policy Research’s Free Enterprise Project, and a long-time proponent of full disclosure of climate change risks in SEC disclosures, noted in a statement the hidden irony in the SEC guidance document. Power industry CEOs are now obligated to provide full disclosure, including the effect that their lobbying activities will have on corporate earnings. "Fully disclosing the business risk of cap-and-trade will embarrass many CEOs who are lobbying for emissions regulations," said Borelli. "Shareholders are going to discover that many CEOs have not been forthcoming about the business risk posed by cap-and-trade legislation and that they have failed to exercise their fiduciary responsibility by not assessing and communicating the impact of emissions regulations on their businesses. Shareholders will discover that these CEOs are pursuing legislation that will negatively impact their company."

Per the SEC guidance, CEOs have no choice but to disclose the nature and extent of their support of climate change legislation, as passage (or defeat) of that legislation (The American Clean Energy and Security Act of 2009 [H.R. 2454], for example) will have a material impact on corporate earnings. Left unsaid is the shareholder response to a CEO’s very visible and public support of climate change legislation that will surely put a dent in earnings.

Three-Ring Circus

I expect annual meetings for power industry – related corporations to become quite the event this year. Borelli cites his own experience confronting Caterpillar CEO Jim Owens last June at Caterpillar’s annual stockholder meeting on this very subject. Borelli asked Owens how he would be held accountable by the shareholders if Caterpillar’s lobbying led to "a regulatory avalanche leaving the U.S. in an uncompetitive situation." Owens’ dismissive response was to tell Borelli to "sell his stock."

Borelli continued to grill Owens about his dismissal of the business risk of cap and trade. Owens finally admitted that a cap-and-trade system will economically harm Caterpillar — less coal mined means fewer heavy mining equipment sales. Now that Owens is on record about the effect of a carbon cap-and-trade system on his company, he is obliged to provide full disclosure in the future. "Disclosure on climate change regulation will expose the conflict between cap-and-trade and shareholder interests," added Borelli in a later statement.

Nowhere to Turn

Owens and power industry CEOs now find themselves between the proverbial rock and a hard place. If full disclosure of their climate change lobbying activities and the inherent shareholder risk of those activities is not forthcoming per the new SEC guidelines, then expect an avalanche of shareholder lawsuits, SEC complaints, and rowdy annual meetings to become the norm. Shareholders will demand an explanation of why their CEO is lobbying for legislation that has or will depress stock prices. CEOs are not the only group interested in quarterly returns.

Owens flippantly suggested that shareholders sell their Caterpillar stock should the climate change legislation he champions depress business. Now that he must completely disclose his lobbying efforts — and given the dishevelment that H.R. 2454 or similar legislation will cause the nation’s economy — I suspect Owens’ words will prove prophetic.

—Dr. Robert Peltier, PE, is POWER’s editor-in-chief.