Recent Developments In Corporate Disclosure Of Climate Change Risk - Part II

Thursday, May 1, 2008 - 01:00

Part I of this article appeared in the April issue of The Metropolitan Corporate Counsel. It dealt with current securities law requirements for disclosure regarding any material impacts of greenhouse gas emissions and the need for clear guidance by the SEC as to what it expects from companies with regard to their climate change risks. In addition, the pressures being placed on companies by shareholder proposals as to the effects of climate change are resulting in more disclosure and sensitivity on the part of public companies. For a review of Part Iof this article, please see our website at

New York Subpoenas

On September 14, 2007, Attorney General Cuomo subpoenaed five large energy companies who plan to build coal-fired power plants, in order to determine whether the companies have adequately disclosed the financial risks posed by prospective climate change regulations, more specifically, the costs associated with carbon-intensive electricity generation. Attorney General Cuomo issued the subpoenas under the Martin Act, the same state securities law wielded by his predecessor, Governor Eliot Spitzer, as a means of investigating alleged corruption on Wall Street. Letters accompanying the subpoenas stated "[a]ny one of the several new or likely regulatory initiatives for CO2 emissions from power plants - including state carbon controls, EPA's regulations under the Clear Air Act, or the enactment of federal global warming legislation - would add a significant cost to carbon-intensive coal generation." The letters added that,"[s]elective disclosure of favorable information or omission of unfavorable information concerning climate change is misleading."

A unique feature of the fraud provision of the Martin Act is that the threshold for liability is quite low because the traditional legal elements of fraud, intent and reliance do not need to be proven. Instead, the only traditional elements of fraud that the Attorney General must show are "material misrepresentation or material omission" regardless of intent or reliance. While the Martin Act does not define what information is "material" for disclosure purposes, the New York Court of Appeals has adopted the federal standard concerning material omissions as enunciated by the United Stated Supreme Court. According to the Supreme Court, "[a]n omitted fact is material if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote. It does not require proof of a substantial likelihood that disclosure of the omitted fact would have caused a reasonable investor to change this vote." Any determination by the Attorney General that the subpoenaed companies' disclosures are materially deficient under the Martin Act due to omission of data on climate change risks associated with the planned construction in New York of coal-fired power plants could have broad collateral repercussions - not just for companies doing business in New York, but also for companies doing business in other jurisdictions with activist Attorneys General and similarly broad state statutes governing disclosure.

Proposed Federal Legislation

The United States Congress is actively considering numerous comprehensive climate change bills aimed at reducing GHG emissions levels in the United States. Three of these bills, the "Lieberman-Warner Climate Security Act" (S. 2191), the "Global Warming Pollution Act" (S. 309), also known as the Sanders-Boxer bill, and the "Global Warming Reduction Act of 2007" (S. 485), also referred to as the Kerry-Snowe bill, each would require that the SEC issue climate change disclosure rules within two years. All three bills direct the SEC to establish a standardized format for climate change disclosure. If passed, the laws would require the SEC immediately to clarify the scope of Items 101 and 303 of Regulation S-K with respect to whether the United States' international commitments relating to climate change are "considered to be a material effect" on the reporting company and to designate global warming as a "known trend" within the meaning of the MD&A disclosure requirements. The bills also require a company to disclose any financial exposure stemming from its own GHG emissions and the impact that global warming may have on its interests, even if the issuer is not a GHG emitter. While none of these bills has become law, the Lieberman-Warner Climate Security Act is the first federal climate change bill voted out of committee in the Senate, passing the Environment and Public Works Committee on December 5, 2007 by an eleven to eight vote. No additional activity on the bill is expected until some time in early 2008.

Potential Impact of U.S. Supreme Court's Massachusetts v. EPA Decision

On April 2, 2007, the US Supreme Court issued a five-to-four decision in Massachusetts v. EPA , rejecting the EPA's position that it did not have authority under Section 202 of the Clean Air Act to regulate greenhouse gas emissions from automobiles. In reaching this conclusion, a majority of the Court found that GHGs fit within the statute's "sweeping definition" of an air pollutant. Further, the Court observed that the EPA failed to identify anything "suggesting that Congress meant to curtail EPA's power to treat greenhouse gases as air pollutants," and ruled that unless EPA affirmatively were to conclude that greenhouse gases are not causing climate change (a conclusion that the Court pointedly noted the EPA has not reached), the agency must regulate automobile GHG emissions under the Clean Air Act.

The Court's decision in Massachusetts v. EPA is likely to have important implications in a number of contexts and is especially important for national and local climate change policy. Not only does it pave the way for regulation of greenhouse gases under the Clean Air Act, it is also likely to bolster calls for more comprehensive federal climate change legislation, including legislation that covers sectors other than transportation, as well as non-CO2 greenhouse gases. Moreover, the Massachusetts v. EPA ruling could lend support to state initiatives, such as the California legislation intended to regulate greenhouse gases as a pollutant in the transportation sector. A proliferation of more expansive state climate-related initiatives - whether in the legislative and/or regulatory spheres - may provide additional impetus for pre-emptive federal legislation.

D&O Liability InsuranceImplications

The Court's ruling in Massachusetts v. EPA may also impact the availability of insurance coverage for claims against corporate directors and officers related to climate change. Companies typically purchase D&O liability insurance to protect corporate directors and officers against damages claims stemming from decisions made (or not made) and actions taken (or not taken) in their professional capacities. D&O policies typically contain broad provisions that exclude coverage for claims arising from or related to pollution matters. The Court's holding in Massachusetts v. EPA that carbon dioxide emissions are air pollutants could potentially trigger exclusionary clauses that would enable insurers to deny coverage for claims relating to global warming. Even as many companies are just now beginning to assess the risks to their businesses from the effects of global warming, it is foreseeable that D&O insurers may make their own assessments with respect to particular industry sectors and raise rates (or deny coverage) on the basis of a judgment that companies in industries that may be adversely affected by the global warming phenomenon likely will see an increase in shareholder class action lawsuits alleging management's failure to adequately anticipate and prepare for these changes. Clearly, Massachusetts v. EPA's potential trigger of the pollution exclusion in corporate D&O coverage warrants additional scrutiny for many D&O policy holders.


Although domestic climate change legislation and/or regulation is still evolving, there is clearly much greater public scrutiny of corporate "footprints" in the global environment, accompanied by an escalation in shareholder activism in this area. Regardless of whether the SEC chooses to act on the recent petition, Attorney General Cuomo files charges under the Martin Act, or the President and the Congress unite in enacting more rigorous federal environmental legislation, companies with significant GHG emissions or with operations that are particularly prone to climate change-related events should track the various initiatives and make regular re-assessments of whether these events either have, or may have (under the requisite "known trends and uncertainties" analysis demanded by MD&A requirements) a material effect on financial condition or results of operations. Mounting shareholder activism already appears to be prompting change in some sectors of the corporate community, and cannot be ignored. Keep in mind that materiality judgments under the SEC's disclosure rules turns on what has become important to the "reasonable investor" - whoever that elusive figure might be. Prudent companies therefore will act now to consider their potential exposure under existing laws and regulations, and develop strategies and internal procedures for gathering and analyzing information about climate change risk to ensure adequate disclosure of these prospective risks where material from the perspective of the securities markets as a whole.

David R. Berz is the Managing Partner of Weil Gotshal's Washington DC office and head of the firm's Environmental Practice. Matthew Morton is an Associate in the Washington DC office and practices in the litigation and regulatory area.

Please email the authors at or with questions about this article.