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October 08, 2007

Investors, States, and Activists Petition Securities and Exchange Commission To Mandate Climate Risk Disclosure
    by Francesca Rheannon

Twenty-two petitioners representing investment managers, state officials and environmental groups recently filed a petition with the Securities and Exchange Commission to improve reporting by companies on the financial impact of climate change. -- The petitioners include the investor coalition Ceres, Pax World Mutual Funds, the environmental organization Friends of the Earth, and states from California to Vermont.

SRI Mutual Funds Guide“The issue of climate change is significant for the state of Vermont -- everything from maple syrup to dairy to the ski industry is at risk. It makes sense to use whatever resources we have to encourage corporations to respond and find solutions to the problem,” Vermont State Treasurer Jeb Spaulding told

Environmental risks aside, the petition focuses on the financial implications of climate change for investors, stating that “climate risk has become too important to corporate performance to be left out of mandatory disclosures under the securities laws and the Commission’s rules.”

Existing Commission rules relating to “material risks” to investment by “known trends” already requires such disclosure, the petition argues. It asks the SEC to provide explicit guidance to companies on how to apply these rules to reporting about climate change impacts on their business.

Michelle Chan-Fishel, coordinator of the Green Investments Program of Friends of the Earth contributed to the research supporting the petition. She says SEC guidance on reporting climate change impacts on investment outcomes is crucial because no standard presentation exists. “Disclosure rates are improving,” Chan-Fishel told, “but it’s a question of reporting. There’s a lot of variance. Investors need to receive information in a format that is consistent and accurate.”

According to the petition, small and individual investors are especially disadvantaged by uneven and inconsistent reporting by companies, since they lack access to the services of expensive private consultants who analyze climate change impacts for large investment firms. Chan-Fishel agrees: “The SEC needs to tell companies how to report in order to level the playing field.”

The petition highlights its assertion that climate risks meet the “standard of materiality” established by the Commission and the courts. It cites in particular two existing rules as relevant to disclosing material risks. FAS-5 (Statement of Financial Accounting Standards No. 5) requires dollar values to be assigned to “material contingent liabilities” and entered into a company’s balance sheet. If a liability cannot be estimated, as is currently true for many impacts of climate change, it must be disclosed as a footnote.

The rule might apply, for example, to the estimated cost of permafrost melting that may be incurred by the consortium of companies owning the Alaska Pipeline, including Exxon Mobil(XON). The petition singles that company out for criticism on its reporting, charging it “mentioned climate change in one perfunctory reference in the 126 pages of its 2006 10-K filing with the SEC,” and was otherwise silent on the issue.

Another rule is Regulation S-K, which mandates disclosure of material risks related to climate change as a narrative when they cannot be quantified. That could happen when a company’s analysis of such risks “may not yet have reached the level of sophistication or certainty that would allow or require disclosure of climate risk as a specific amount or even a range of amounts on the balance sheet.”

If a company’s market value risks being undermined by climate change litigation or by its failure to incorporate climate change considerations into its business activities, it would have to disclose the information under Regulation S-K, the petition claims.

Another relevant SEC regulation is the “Management’s Discussion and Analysis of Financial Conditions and Results of Operations (MD&A),” which mandates disclosure of “known trends, uncertainties or other factors” that could have a material impact on a “company’s liquidity, capital resources, revenues and results of operations.” One such “known trend” is climate change regulation, which is stepping up on all levels, from states to regions to the international sphere.

The petition places accurate and comprehensive reporting on climate change impacts squarely within the fiduciary responsibility of public corporations. As has been reported earlier in, most boards of directors limit their understanding of this responsibility to quarterly profits. But climate change encompasses all time lines, from impacts already occurring to those that extend over the medium and long term.

The Pax World Fund understands this. “We joined the other petitioners because we believe that there is ample evidence that climate change will have pervasive impacts on the future financial performance of enterprises, industries, sectors, and markets, and that investors and asset managers need information on what those effects are in order to manage portfolios and assets prudently,” Julie Gorte, Pax World’s Senior Vice President of Sustainable Investing told

For the petitioners, fiduciary and social responsibilities go hand-in-hand. For environmentalists, like petitioners Friends of the Earth or Environmental Defense, the reporting requirement is a way to trigger corporations’ interest in climate change and thereby spur change upstream. Shareholders, such as state pension fund managers and investment groups, will have better information to make downstream decisions about investments from both a financial and social angle. Finally, provided with a consistent set of questions from the SEC, corporate boards will be motivated to strategize about minimizing climate change-driven risks and maximizing opportunities.

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