REGULATION:

SEC turnaround sparks sudden look at climate disclosure

Federal regulators are preparing to launch "a very serious look" at requiring corporations to assess and reveal the effects of climate change on their financial health, according to a commissioner on the Securities and Exchange Commission.

Initial efforts are under way, moving the commission toward a conclusion that investment groups had sought unsuccessfully throughout much of the Bush administration: forcing public companies to report the dangers they face from releasing carbon dioxide and its warming aftermath.

"I think with the changes in the environment and everything that's been happening, it's really time for us to take another very serious look at the disclosure system in this area," Elisse Walter, one of five commissioners at the SEC, told E&E on Friday. "I think it's a very serious issue."

The move would drive the government deeper into the climate debate, potentially reshaping management decisions at companies across the country. It comes as the commission is holding private meetings with top-level advocates of "climate risk disclosure" to discuss what climate-related questions should be asked of companies, according to participants.

One of those advocates is Wisconsin insurance regulator Sean Dilweg, who helped shepherd a landmark disclosure requirement through the National Association of Insurance Commissioners this spring. It is the nation's first such rule, and it compels the vast insurance industry to grapple with its climate challenges.

The insurance initiative, after leading the way, could be eclipsed if the SEC flexes its muscles. The commission oversees every publicly traded company in the country.

"My sense was they're very interested," Dilweg said of the SEC in an interview. "They want to do something this year."

SEC is 'working on it'

Over the last several weeks, Dilweg and managers of large investment funds, including Maryland Treasurer Nancy Kopp, have attended two meetings at SEC headquarters in Washington. Ceres, a group of institutional investors and the main motor behind climate risk disclosure, coordinated the meetings. Commissioner Walter attended one, and a senior adviser to SEC Chairwoman Mary Schapiro was at the other. More meetings are planned.

That marks a turnaround, says Mindy Lubber, president of Ceres, who described the commission's answer to calls for disclosure under former Chairman Christopher Cox as a "deafening no response."

Now, notes Lubber, who attended the meeting with Walter, the SEC's interest is "extremely high."

Advocates are increasingly hopeful that the SEC will move rapidly to issue formal guidance instructing companies to delve deeply into the climate issue to understand how it could increase their risks related to physical damage, financial loss and legal liability.

"The staff is going to be working on it this year," Walter said, adding that it would be too speculative to predict when, or if, the commission would formally adopt new disclosure standards.

"We have a lot of internal education to do," she said. "This obviously is not an agency populated with climate experts, and we're going to talk to everyone who is knowledgeable in the area, who's willing to talk to us. We'll educate ourselves, and then we'll decide -- the staff will decide -- what to put before the commission or not."

Derivatives sneaked by; climate might not

Schapiro, who took over as chairwoman in January, has signaled that greater transparency in the financial markets is needed. She took the rudder as the commission was sustaining withering criticism for taking a hands-off regulatory approach before the financial freefall. Observers are optimistic that climate disclosure will be one mark of a more assertive stance.

If that occurs, it could have unsavory consequences for long lists of businesses.

Big emitters like oil and gas companies, for example, might have to formally reveal the output of their greenhouse gases and the disadvantages they face from federal efforts to charge polluters for every ton of carbon that's released.

Even more, the revelations could spark financial fallout. Institutional investment groups with trillions of dollars in assets could use the disclosures as the basis for withdrawing money from companies they consider unprepared for rising risk related to regulation and climatic convulsions.

"It's reasonable to expect that companies would fail to focus on long-term risk posed by climate change, and more forced disclosure would correct a potential market failure," said John Echeverria, executive director of Georgetown University's Environmental Law and Policy Institute. "That seems like incredibly important information that investors might have."

Is disclosure 'impossible' or on the horizon?

About 76 percent of Standard & Poor's 500 companies failed to mention climate change in their annual reports to the commission last year, according to a report released last month by Ceres and two environmental groups.

That demonstrates a "fundamental failure" by the SEC, whose laws already require companies to reveal climatic threats to their bottom line, the groups say. Ceres submitted a 90-page petition to the SEC in 2007 asking it to issue clarifying -- and strengthening -- guidance documents that would force companies to comply.

New requirements by the SEC, for example, could make companies reveal their potential losses associated with a federal cap-and-trade program. They would, effectively, be made to put a dollar amount on climate change.

That sends shivers through industry leaders. CEOs are reticent to enshrine predictions in their annual statements, which can be used against a company in lawsuits and in the realm of public opinion. One expert on the insurance industry likened that to an executive signing his signature in blood.

"I think that's just impossible until you have legislation passed," Tom Williams, a spokesman for Duke Energy, said of placing dollar figures on the cost of carbon in the company's annual statement.

Catching industry off-guard

Duke is in a rare industry that frequently addresses climate change in its annual reports to the SEC. Most utilities do, knowing that they would be among the first casualties if Congress put a price on carbon. Duke, for example, reported to the SEC last year that it is responsible for about 1.5 percent of the United States' carbon dioxide emissions.

Ceres applauds utilities for trying, but says the industry provides limited information. Duke and most other companies are not specific about what a federal carbon cap could mean for their bottom line.

That's due, in part, to the complexity of the climate problem. Most companies have not dived into a comprehensive assessment about how uncertain legislation and climatic conditions, like rising seas, stronger storms and heavier rainfall, will hit them financially, said Greg Rogers, a lawyer and president of Advanced Environmental Dimensions, a consulting group.

They would be caught off-guard if the SEC were to issue new requirements this year or next, he said.

"That's a widespread mobilization," said Rogers, who helped draft a similar disclosure standard that was dropped from the climate bill introduced last year by Sen. Joe Lieberman (I-Conn.) and former Sen. John Warner (R-Va.).

"That would mean every single public company in the United States would have to look at this at least long enough to reach a determination if it was material to them or not," he added.

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