Several investment groups, state finance officials from 10 states, and environmental groups recently petitioned the Securities Exchange Commission to require companies to assess and disclose fully the financial risks associated with climate change. In a landmark petition to the SEC, 22 petitioners called on the SEC to issue guidance clarifying that climate-related information is considered material and must be included in corporate disclosures under existing law. Their request did not seek new regulations. Instead, the petitioners requested clarification that existing disclosure requirements in the Securities Exchange Act of 1934 mandate the disclosure of climate change risks. If the SEC decides that clarification is necessary, the Commission could issue guidance through an informal staff document or a more formal act.

Recently, Andrew Cuomo, Attorney General of New York State, issued subpoenas to five energy companies seeking information regarding the companies' analyses of their climate risks and the disclosure of these risks to investors. Under federal and state laws and regulations, as Attorney General Cuomo pointed out, disclosures to investors must be complete and not misleading. The New York State inquiries, along with the SEC's response to the climate change petition, may signal a significant development in defining what constitutes adequate climate risk disclosures in future SEC filings.

Public companies, companies going public, and certain other companies issuing securities must disclose in SEC filings any material effects on capital expenditures, earnings and competitive position that are associated with federal, state, and local environmental regulatory compliance. SEC regulations require disclosure of any material legal proceedings in which a company is involved. This would include litigation stemming from the company's failure to comply with state greenhouse gas regulations. Additionally, SEC rules require the disclosure of any known trends, commitments, events, or uncertainties that will cause a material effect on the company's liquidity if required to incur large capital expenditures in order to comply. Companies having high levels of greenhouse gas emissions operating in states with climate change regulations could experience material effects on their liquidity. In addition to SEC disclosure requirements, FAS 5 requires a company subject to material liabilities to accrue a charge against current income for the estimated liability amount. Again, companies with significant greenhouse gas emissions subject to state climate change legislation would be required to disclose the associated material risks on their balance sheets. Although the SEC has not issued a concise determination of what is material, policy makers are feeling increased pressure to require companies to fully disclose climate change risks in their securities filings. Companies will find it necessary to identify potential business opportunities stemming from global warming, along with any financial risks. For example, this could include profits from any future emission-trading mechanisms that may be implemented. Additionally, risks could include operational, market, liability, regulatory, and reputational risks.

The petition to the SEC builds on prior reports examining climate change risk disclosures by companies worldwide. A July 2007 study by KPMG, Reporting the Business Implications of Climate Change in Sustainability Reports, found that while many companies are reporting business opportunities associated with climate change, few are identifying its financial risks. The most frequently disclosed risk was the threat of increased energy costs, reported by only 20 percent of the companies surveyed. Although a 2007 report prepared for Calvert Investments and Ceres, Climate Risk Disclosure by the S&P 500, found that electric utilities and automakers were providing more detailed disclosures than other industries, the group petitioning the SEC asserted that these disclosures continue to be inadequate. In light of these reports, financial institutions are finding it necessary to contend with climate-oriented investment groups managing trillions of dollars in assets. "Green" investment initiatives, like the Institutional Investor Group on Climate Change (IIGCC) and the Investor Network on Climate Risk (INCR), also are exerting pressure on companies to assess and disclose financial risks from climate change. In addition, several climate change bills currently pending in Congress would require companies to identify financial risks posed by the threat of climate change in their periodic SEC filings.

In its recent Massachusetts v. E.P.A. decision, the U.S. Supreme Court stated, "the harms associated with climate change are well recognized." Just last year, The Stern Review: The Economics of Climate Change report predicted "the overall costs and risks of climate change will be equivalent to losing at least 5% of global GDP each year, . . . and could rise to 20% or more." Because a significant number of states have either passed, or are considering adopting, laws that limit greenhouse gas emissions, companies may find it necessary to make large expenditures in order to comply with new climate change regulations. These expenditures could affect investment decisions by future investors according to the petitioners and should be disclosed.

A variety of companies, including insurance providers such as Allstate, AIG and MetLife, have begun disclosing financial risks associated with climate change. This encompasses financial losses from hurricanes, flooding, drought, fires, and other inclement meteorological phenomena. In the United States alone, weather-related events since 1980 have been responsible for an estimated $546 billion in damages. Additionally, a greater number of companies are now disclosing potential profits associated with implementing energy-efficient strategies and emission-reducing technologies.

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