U.S. Companies Are Feeling The Heat On Climate Change

Sept. 28, 2006
U.S. companies face growing pressure from shareholders, investors and insurers, to assess and publicly address climate risks. They are moving rapidly to satisfy the markets and their shareholders, defend lawsuits and stave off future liability.

Global climate change has become a "hot button" issue for U.S. companies facing strong and immediate pressures to assess their "carbon footprints" and increase their energy efficiencies, while minimizing risks posed by long-term environmental damage and future regulatory programs. Corporate officers must be proactive in their approach and sensitive to climate issues in all aspects of their companies' operations. Proactive companies are reaping rewards in the form of cost savings, risk avoidance and enhanced public image.

In the absence of a federal carbon regulatory scheme, shareholders and institutional investors are ratcheting up the pressure on companies to reduce greenhouse gas (GHG) emissions through corporate disclosure. By mid-2006, over 30 climate-related shareholder resolutions had been filed with U.S. companies. These resolutions, which generally request disclosure of emissions data and corporate plans to respond to climate risks, are filed by public institutional investors such as city and state pension funds. While shareholder focus has been on the electric power and oil and gas sectors, resolutions have also been filed in a number of other sectors. Some of these resolutions were withdrawn only after the companies agreed to undertake internal assessments. Others were eventually excluded by the Securities and Exchange Commission (SEC) on technical grounds. See www.ceres.org and www.incr.com/investor for more information on these resolutions.

The Carbon Disclosure Project, formed in 2000, is another initiative prodding companies to assess the link between shareholder value and GHG emissions. In February 2006, a group of 211 institutional investors with assets under management of $31 trillion sent questionnaires to 1,900 of the largest quoted companies in the world in terms of market capitalization. These companies were asked to publicly disclose their emissions, describe actions taken to minimize them, and indicate how that affects their bottom line. The response rate has been high. See www.cdproject.net

SEC filings provide another avenue for disclosure. SEC rules provide that "specific known trends, events or uncertainties that are reasonably likely to have a material effect on a company's financial condition or operating performance" must appear in a company's filings. Though the SEC does not specifically require reporting on climate change and GHG emissions, over 90% of the largest publicly traded utilities have addressed climate change in recent filings.

Financial institutions are also pushing companies to take climate change into account in their operations and transactions. In 2005, Goldman Sachs became the first investment bank to commit to limit GHG emissions and encourage clean energy development. Other such institutions have adopted risk management policies to encourage large-emitting clients to develop carbon mitigation plans and help those clients to quantify the financial costs of such emissions which are included in the financial analyses of the transactions.

Having experienced huge losses during the 2004 and 2005 hurricane seasons, insurance companies have responded to the potential long-term risks of climate change. Insurers are allying themselves with institutional investors, banks and rating agencies to pressure companies to consider climate change and GHG emissions as another form of material financial risk. Moreover, climate change presents business opportunities for them as the world's largest insurance companies and brokers offer innovative products and services.

The courts are also being used to force companies to address climate change and to seek to hold them liable for its effects. A suit filed by eight states, the City of New York and others against five electric utilities under tort law theories, seeks to compel those utilities to cap their CO2 emissions and reduce them over ten years. A federal district court in New York dismissed the case, and an appeal is pending. Another tort suit is pending in federal district court in Mississippi. That suit alleges that GHG emissions from electric utilities and oil, coal and chemical companies contributed to global warming which, in turn, contributed to an increase in the severity of Hurricane Katrina, resulting in greater damage than would have occurred otherwise.

Other cases seek to compel regulation of greenhouse gases through existing federal statutes. The Supreme Court is reviewing EPA's determination that it lacks authority under the Clean Air Act to regulate GHG emissions from new motor vehicles. Depending upon how the Court rules, this case could impact a wide range of industries. Companies with possible exposure should take notice.

Companies face a proliferation of state and local regulatory initiatives relating to GHG emissions. With the U.S. outside the Kyoto Protocol, and Congress having thus far declined to compel GHG emission reductions, states and municipalities have sought to fill the void. California has instituted auto emissions regulations, while states like Oregon have implemented their own programs. Seven northeastern states have joined to require a reduction in GHG emissions from power plants through a cap-and-trade system expected to become operational in 2009. California's automobile emissions statute has already been challenged in court and challenges to other state and local initiatives may occur.

Regulatory compliance aside, companies seeking to improve their "sustainability" image are taking advantage of a growing number of voluntary programs. Their participation has often improved public relations, helped the bottom line, and provided a strong image of corporate responsibility. Proactive companies can participate in nonprofit or voluntary government programs such as the Pew Center's Business Partnership, EPA's Climate Leaders or DOE's Climate Vision Programs. They can also join over 175 companies, including AEP, Ford, Motorola, DuPont and IBM, at the Chicago Climate Exchange to gain experience and profit from further emissions reductions.

Climate change and its attendant risks have become real concerns for U.S. companies. However, as they feel the heat, opportunities have arisen that can lead to flexible, informed approaches that minimize risk and maximize energy efficiencies.

David J. van Hoogstraten and James W. Rubin are lawyers at the law firm of Hunton & Williams in Washington, D.C.

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