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SEC issues climate change disclosure guidance

As anticipated, the U.S. Securities and Exchange Commission ("SEC") voted 3-2 yesterday to release interpretive guidance regarding climate change disclosure by public companies. The guidance clearly signals the SEC's heightened expectation regarding climate change disclosure. However, issuers may find that the guidance raises more questions than it answers.

SEC Chairman Mary Shapiro was careful to emphasize that yesterday's release constitutes guidance, not an amendment to existing disclosure rules. She also noted that the SEC was expressing no view regarding the existence, pace or causes of climate change. This caveat reflects the highly politicized nature of the climate change issue in the U.S. Despite the "political sensitivity" of the issue, the SEC's guidance is intended to ensure that "disclosure rules are consistently applied...so that investors get reliable information."

The guidance, which is not yet available on the SEC website but is summarized in a press release, highlights that the following four issues may require disclosure:

• "Impact of Legislation and Regulation: When assessing potential disclosure obligations, a company should consider whether the impact of certain existing laws and regulations regarding climate change is material. In certain circumstances, a company should also evaluate the potential impact of pending legislation and regulation related to this topic.
• Impact of International Accords: A company should consider, and disclose when material, the risks or effects on its business of international accords and treaties relating to climate change.
• Indirect Consequences of Regulation or Business Trends: Legal, technological, political and scientific developments regarding climate change may create new opportunities or risks for companies. For instance, a company may face decreased demand for goods that produce significant greenhouse gas emissions or increased demand for goods that result in lower emissions than competing products. As such, a company should consider, for disclosure purposes, the actual or potential indirect consequences it may face due to climate change related regulatory or business trends.
• Physical Impacts of Climate Change: Companies should also evaluate for disclosure purposes the actual and potential material impacts of environmental matters on their business."

Interestingly, the guidance does not provide any guidance as to when companies should disclose actual emissions data. Presumably, it will be left to the issuers to determine when this level of detail is material.

Particularly challenging will be the call to disclose the impact of "pending legislation and regulation", the "potential indirect consequences it may due to climate change related regulatory or business trends", and " potential material impacts of environmental matters on their business". This type of speculative disclosure begs several questions: To be material, do pending legislation or potential consequences have to be possible, probable or certain? How are companies expected to assess the probability and likely magnitude of the impact of future contingent events? On whose assessment may they rely? What happens if an issuer provides disclosure based on speculation today that proves to be wrong tomorrow?

Given that these questions remain unanswered, we expect that any disclosure provided in response to the new SEC guidance will be heavily qualified. We also expect that many companies will rely heavily on professional advisors to assist with this speculation. Issuers will no doubt proceed cautiously when preparing climate change disclosure this year. They will have to balance the need to say something that takes the new guidance into account with the risk of saying something that harms share prices and is later found to have been unfounded or unnecessary to disclose.

As discussed in a previous posting, the SEC's guidance will certainly be taken into consideration by the Ontario Securities Commission as it develops its own climate change disclosure guidance in time for the 2010 annual report season.

SEC climate change disclosure requirements imminent; OSC to follow by end of 2010

We have blogged on several occasions about growing support in the investment community for greater disclosure by public companies of the financial risks posed by climate change (for all relevant posting, see here; for our most recent posting regarding shareholder activism in respect of Shell, see here). Investors and other stakeholders have called upon securities regulators to update their requirements in respect of such disclosure. U.S. investors may get their wish tomorrow. Canadian investors do not have long to wait.

SEC proposal

The U.S. Securities and Exchange Commission will be holding a meeting on Wednesday, January 27 at 10:00 a.m. to consider and vote on two proposals, the second of which is the following:

The Commission will consider a recommendation to publish an interpretive release to provide guidance to public companies regarding the Commission's current disclosure requirements concerning matters relating to climate change.

The recommendation, if endorsed, will have the SEC publish much more detailed guidance on how and what companies are to report with respect to climate change. Ideally, the SEC will require that companies disclose their emissions levels, discuss and quantify both regulatory risks (e.g., costs of complying with cap-and-trade or other emissions reduction obligations) and operational risks (e.g., impact of extreme weather events, changes in demand as a result of legislation), and discuss corporate strategies for addressing such risks and capitalizing on any opportunities created by climate change.

General implications

The guidance is a long time coming. Some groups, like the Investor Network on Climate Risk, have been petitioning the SEC since 2003 to improve its climate change guidance. Forward thinking investors have increasingly recognizing that the legal and physical changes brought about by climate change are financially material. Increasingly, the costs associated with climate change will have to be internalized by companies and will be reflected in the market's valuation of the securities of those companies.

Many large scale emitters will likely be happy to have the SEC tell them what to do about climate change disclosure. Several such companies have been forced by state-led lawsuits, environmental class actions, and shareholder activism to acknowledge that climate change is financially material to their business. SEC guidance would provide a level of clarity and certainty that civil litigation and proxy wars cannot offer.

Ultimately, clearer disclosure requirements should give the market access to the information they need to understand the impact of climate change on the long term value of companies. This improved understanding could drive a significant reallocation of capital that would have the potential to accelerate the transition towards a more sustainable economy.

Canada next

On December 18, 2009, the Ontario Securities Commission ("OSC") issued Staff Notice 51-717 to notify stakeholders of its plans regarding disclosure of corporate governance and environmental matters during 2010. With respect to environmental disclosure guidance, the notice says the following:

"During 2010, we intend to issue a staff notice providing guidance on compliance with existing environmental disclosure requirements under National Instrument 51-102 Continuous Disclosure Obligations. In developing the notice, we plan to consult with our advisory committees and other experts in this area. We intend to publish the notice by December 2010 so that reporting issuers will have sufficient time to consider the guidance when preparing their 2010 annual continuous disclosure documents."

It therefore appears that the OSC intends to prepare environmental disclosure guidance that it will expect reporting issuers to follow when preparing their 2010 annual report.

While the notice only discusses environmental disclosure generally, we expect that the OSC's guidance will deal with climate change issues specifically. In a December 18, 2009 report to the Minister of Finance on the OSC's corporate sustainability reporting initiative, the OSC referred to climate change risk in several places. It also took specific notice of a submission from the British Columbia Investment Management Corporation, Ceres, Climate Action Network Canada and the Climate Change Lawyers Network which included a survey of the annual reports of 35 reporting issuers in Ontario in nine industry sectors with market capitalization of at least CDN $1 billion. The survey found that the disclosure contained poor or limited descriptions of climate change risks, if the issue was discussed at all. The OSC's guidance will likely address this gap in disclosure by providing suggestions as to what should be disclosed where climate change is material for a reporting issuer.

Given the strong linkages between the capital markets of Canada and the U.S., we expect that the OSC (and other Canadian securities regulators) will follow the SEC's lead with respect to climate change disclosure guidance. The outcome of the SEC's meeting tomorrow, and the guidance that it subsequently issues, may therefore help companies anticipate what type of climate change disclosure the OSC will require by the end of 2010.

Investors' petition to Shell to improve oil sands disclosure is a sign of a broader trend

A coalition of over 140 investors wants the opportunity to scrutinize Royal Dutch Shell plc's decision to invest in Alberta's oil sands. The investors succeeded in having a motion added to the agenda for Shell's 2010 annual general meeting that, if passed, will require the company's Audit Committee or Risk Committee to report on the relevant investment analysis in time for the 2011 AGM. While this initiative is uniquely focused on Shell, it is part of a larger trend whereby progressive investors are calling upon large emitters to improve their climate change disclosure. Canadian reporting issuers should consider preparing today for the disclosure requirements of the future.

The Shell motion

The initiative is being co-ordinated by FairPensions, campaigning organisation founded in 2005 to promote responsible investment in the pensions and investment industry. The coaltions 142 supporters include fund managers, pension funds, foundations and faith groups. Major financial players in the coalition include The Co-operative Asset Management (which is also funding legal action by the Creen Nation alleging that Shell's oil sands development infringes their Constitutionally protected rights), the UNISON Staff Pension Scheme and a significant contribution from Rathbone Greenbank Investments clients.

The following is the full text of the proposed resolution:

That in order to address our concerns for the long term success of the Company arising from the risks associated with oil sands, we as shareholders of the Company direct that the Audit Committee or a Risk Committee of the Board commissions and reviews a report setting out the assumptions made by the Company in deciding to proceed with oil sands projects regarding future carbon prices, oil price volatility, demand for oil, anticipated regulation of greenhouse gas emissions and legal and reputational risks arising from local environmental damage and impairment of traditional livelihoods. The findings of the report and review should be reported to investors in the Business Review section of the Company's Annual Report presented to the Annual General Meeting in 2011.

The motion was informed by a general concern about the environmental impacts of the development of the oil sands and specifically by concerns regarding:

• the carbon intensity of the oil sands projects at a time of anticipated regulation and pricing of greenhouse gas emissions;
• forecasted carbon prices;
• the limitations and cost of emissions mitigation; and
• local environmental and livelihoods issues.

In its response, Shell noted that the oil sands account for only 2.5% of its production. "The resolution is basically a request for further information around the economics and other aspects of our oil sands operations. The resolution is submitted by shareholders representing some 0.15% of our total outstanding shares," said the company.

The investor's acknowledged that Shell has provided some disclosure, but believe that more is required. The Co-operative Asset Management's Niall O'Shea said, "given Shell's level of commitment to oil sands there is a greater obligation to shareholders to reassure how it would cope under a number of scenarios. We acknowledge Shell has already done some work in this area but it does not go anywhere near far enough to allay our concerns."

Shell's AGM will be held in the Hague on May 18, 2010.

Broader trend

Shell is not the only entity under pressure to improve environmental disclosure in the public markets. A variety of investor-backed initiatives are calling for more thorough financial reporting and discussion of climate change issues by public companies. Some recent examples include the following:

• The Climate Disclosure Project, which calls upon companies to disclose climate change risk voluntarily, entered its 9th year last year. CDP's 2009 request for information was sent on behalf of 475 global investors with assets under management of US$55-trillion, including 47 of Canada's largest investment organizations.
• In October 2009, the Ontario Securities Commission received a submission from a coalition of investors and environmentalists calling on it to address the poor rates of climate change disclosure in the annual reports of Canadian reporting issuers. The submission was prepared by the Climate Change Lawyers Network and endorsed by British Columbia Investment Management Corporation (bcIMC), Ceres and Climate Action Network Canada. It was based on a review of 35 reporting issuers with market capitalizations of more than $1 billion who operate in sectors that are particularly exposed to climate change risk. Finding disclosure to be wanting, the submission calls upon the OSC to issue guidance that could be informed in part by the Global Framework for Climate Risk Disclosure.
• Last November, a coalition of investors submitted a supplemental petition to the U.S. Securities and Exchange Commission asking for improved disclosure guidance. The 20 signatories to the petition include leading U.S. and Canadian institutional investors managing more than $1 trillion in assets, including the California Public Employees' Retirement System (CalPERS), British Columbia Investment Management Corporation of Canada, Pax World Management Corporation, state treasurers from Oregon, North Carolina, Connecticut, Maryland and Vermont and Florida's Chief Financial Officer. In an accompanying press release, Ceres notes that the "simple truth" behind the petition is that "it's impossible for investors to adequately assess the risk to their investment money if companies don't tell them how much climate change and its impacts might affect their financial performance."
• As we reported previously, New York's Attorney General Andrew Cuomo dusted off an obscure piece of legislation called the Martin Act and relied upon it to subpoena five large energy companies in 2007 to demand information about the companies' analysis of the risk posed by climate change and the disclosure of that risk to investors. The Financial Post reported on December 5, 2009 that three of the companies, AES Corp., Xcel Energy Inc. and Dynergy Inc., had all agreed to provide disclosure as part of settlements with the Attorney General.

Despite the lacklustre outcome of Copenhagen, the glacial progress of the Waxman-Markey bill through the U.S. Senate, and Canada's lack of emissions policy at the federal level, we expect that the investment community will continue to call for improved climate change disclosure through 2010. This trend will be facilitated by the introduction of mandatory emissions reporting requirements in many jurisdictions and by the credible threat that the U.S. EPA will regulate greenhouse gases if Congress fails to do so.

Companies may be wary of being the first to provide comprehensive climate change disclosure, as doing so may (fairly or unfairly) cause the market to devalue the stocks of such companies relative to their more tight-lipped peers. However, companies should nevertheless expect that more disclosure will be required in the foreseeable future. Such companies will not be able to understand their climate change risk exposure overnight. They should therefore consider developing systems today to enable them to meet the disclosure requirements of tomorrow.

Québec announces its GHG reduction target: 20% below 1990 levels by 2020

Last week, Québec Premier Jean Charest and Minister of Sustainable Development, Environment and Parks, Line Beauchamp, unveiled the province's target to reduce greenhouse gas emissions (GHG) by 20% below 1990 levels by the year 2020. Seeking to be recognized as a Canadian leader against climate change, Québec has decided to set an objective similar to that established by the European Union.

In making the announcement, Premier Charest acknowledged that the province's target is very ambitious, especially given that 48% of its total energy requirements are currently satisfied by renewable energy sources. At approximately 11 tons per capita, or half the Canadian average, Québec already currently holds the best GHG emissions record in Canada. If it can achieve its 20% reduction target by 2020, the province would have the lowest level of emissions per capita in North America.

In announcing its target, the government stated that the proposed measures to be taken would show flexibility from one economic activity sector to another, notably by taking into account each one's overall reduction potential, international competitiveness, available technology and required transition measures. As an illustration of one particular sector's progress to date and to demonstrate that climate change does not necessarily have to come at the expense of economic growth, the Premier noted that the province's industrial sector had already achieved emissions reductions of over 7% in 2006, as compared to 1990 levels, despite the fact that Québec's GDP had increased by 41% over that same period.

As transportation accounts for 40% of Québec's GHG emissions, the government stated that it would be paying particular attention to that sector. In order to achieve the 2020 target, the government expects to make major investments in mass transit options and will take measures to encourage the increased use of intermodal transportation of goods. It also plans to introduce a GHG emission standard for light-duty vehicles equivalent to that in California. Also, as Québec-based corporations have demonstrated expertise in electric vehicle technologies, the government will encourage the development of that industry, as well as the use of such vehicles.

Lastly, through its participation in the Western Climate Initiative, the province will contribute to implementing the largest GHG cap and trade system in North America in 2012. The government expects that these actions will set the stage for a flourishing green economy by the year 2020 and will gradually reduce Québec's economic dependence on foreign oil. It will also lessen the economic impact of the anticipated oil crisis in the decades to come and improve Québec's trade balance.

With less than a week to go before the December 2009 climate conference in Copenhagen, the province of Québec has now clearly announced where it stands on climate change. In a statement aimed at her federal counterpart, Minster Beauchamp declared that "Through this ambitious target, Québec is showing its partners and the international community that it is fully committed to assuming its share of responsibility. By continuing to demonstrate strong leadership, we hope to change the position of the federal government leading up to the Copenhagen Conference."

CN unveils on-line GHG Emissions Calculator to allow customers to assess transportation carbon footprint

CN today unveiled an upgraded on-line greenhouse gas emissions (GHG) calculator that estimates total carbon emissions for shipments across multiple modes of transportation.
CN, recognized as the most fuel-efficient railway in North America, provides the free on-line GHG calculator to the general public on its website. Upon entering basic shipment point-to-point information, the tool generates carbon-emission estimates using a combination of vessel, rail and truck, such as containers moving internationally from Asia to North American destinations along CN's network or domestic shipments using a combination of rail and truck or a single mode of transportation.
The GHG calculator allows manufacturers, importers, exporters, shippers, wholesalers or retailers to assess the carbon footprint of their shipments using single or multiple modes of transportation. Use of the GHG calculator to estimate GHG emissions makes clear the environmental advantage of rail over truck, which has been shown to be up to six times more energy-efficient, because rail consumes a fraction of the fuel to transport one tonne of freight one kilometre. In fact, CN claims that it can move one tonne of freight 197 kilometres on just one litre of fuel. Certainly a convincing argument to invest in the North-American rail system!
In addition to being a powerful environmental conscience-raising initiative, dissemination and use of such tools once again demonstrates the growing competitive advantage that reducing one's carbon emissions represents.

U.S. - Canada Clean Energy Dialogue - First Report

Yesterday Canadian Environment Minister Jim Prentice and U.S. Energy Secretary Steven Chu delivered an update on the two nations' clean energy dialogue (CED), which was first announced when President Obama met with Prime Minister Stephen Harper in Ottawa this past February. The release of the report coincided with Prime Minister Harper's meeting in Washington D.C. with President Obama at which energy was on the agenda and after which Harper reminded the U.S. at a press briefing that: "[...] Canada is by far the largest supplier of energy to the United States. And [it is] determined to be a continental partner in dealing with the [...] linked problems of climate change and energy security [...]".

The three key areas on which Harper and Obama had asked their respective delegates to work together on under the auspices of the CED were: (1) The development and deployment of clean energy technology; (2) the building of a more efficient energy grid, based on clean and renewable generation; and (3) expanding R&D into clean energy.

As part of the countries' collaboration on carbon capture and sequestration (CCS), the report states that the countries will expand on existing collaboration in CO2 injection and storage testing, share information from large-scale CCS demonstration projects such as the Weyburn-Midale project in Saskatchewan, in which carbon dioxide is piped from the Great Plains Synfuels plant in North Dakota to an oilfield operated by EnCana and injected for use in enhanced oil recovery. The report goes on to insist on working towards a consistent regulatory framework between the countries, which would include compatible CCS project rules, standards, and monitoring, as well as verification and accounting principles. Bilateral meetings between Canadian and American CCS experts are planned in mid-2010 and 2011 to share best practices and provide updates on joint activities. The two nations intend to form the "Canada-U.S. CCS Collaboration" under the existing Trilateral Energy Science and Technology Agreement, which also includes Mexico and hope to formalize the arrangement through an implementation agreement by the end of 2009.

As a result of the continued growth in electricity demand, collaboration between the two nations regarding the North American power grid will focus on the open exchange of information and electricity research, development and deployment (RD&D), reliability standards, cyber security and interoperability guidelines. Upgrades to the electric power grid will aim to increase its efficiency and promote connection to clean energy sources, as well as the use of clean energy technologies.

Joint commitments regarding Clean Energy RD&D are meant to boost economic opportunities for the CED partners and the two are to develop a "Clean Energy RD&D Collaboration Framework" and a technology roadmap which would allow both nations to meet their respective 2050 greenhouse gas reduction targets. The Framework and Roadmap would notably foster a unique North American market through common codes, standards and incentives, along with collaborative research and development, sharing of information , facilities and scientific infrastructure.

The Canadian Environment Minister and U.S. Energy Secretary are expected to release the next CED report in the spring of 2010, ahead of the next bilateral meetings.

New study calls on mining sector to adapt to climate change

A new study released by the David Suzuki Foundation confirms that the mining sector is particularly vulnerable to the effects of climate change. The study found that variability in climate has already had a material adverse impact on certain mining operations over the past 20 years. On the assumption that such variability will increase in the future, the study recommends that mining companies and government take a more pro-active approach to understanding climate change risk and implementing appropriate adaptation strategies today.

"Because of its dependency on the natural environment, the Canadian mining sector is particularly vulnerable to the consequences of climate change," said Jason Prno, a mining researcher who co-authored the report. "We spoke with mining stakeholders from across Canada and found a significant number believe that climate change is already having a negative impact on their operations."

Specifically, the study found that mines across Canada have been adversely effected over the past 20 years by climate events including:

• droughts decreasing water availability and forcing gravel quarries to curtail production;
• warm temperatures leading to ice road closures; and
• heavy rains shutting down access roads.

The study calls on the mining industry to understand and communicate climate related risks more effectively, to identify adaptation measures that will deliver benefits regardless of the severity of climate change, and look for solutions that combine adaptation and climate change mitigation measures. With an ever-increasing focus by investors (and securities regulators) on the disclosure and management of climate change risk, forward-thinking mining companies should begin taking action now.

The study also calls on the government to assist the mining sector by doing the following:

• mandate that mines plan for climate change (perhaps as part of decommissioning regulations);
• provide regulatory certainty regarding climate change mitigation by quickly enacting emissions management regulations (e.g., a cap-and-trade system); and
• restore funding for research into climate change forecasting and adaptation.

A full copy of the report is available here. Key findings and a summary for decision makers are also available for download.

PwC (UK) publishes model climate change disclosure report

PricewaterhouseCoopers ("PwC") hasreleased a model climate change disclosure best practice guide. While designed to demonstrate compliance with the UK's new Carbon Reduction Commitment legislation, the guide will be instructive to companies in Canada that are struggling to figure out how to address climate change in their ongoing reporting.

The best practice guide takes the form of a sample report prepared by a fictional company called Typico plc. In addition to reporting on its greenhouse gas emissions, Typico provides an analysis of the strategic implications and corporate response to the risks and opportunities associated with climate change.

Alan McGill, partner in the Sustainability and Climate Change Reporting division at PwC, predicts that companies will increasingly be expected to provide more than just emissions data. "Rather than compliance and data reporting alone, forward-looking analysis and statements of the risks and opportunities affecting a business will become an established part of the reporting cycle. This model will support companies' preparations for that by helping them identify the right questions to ask, the right data to measure and report on, resulting in them taking the right actions for their business."

PwC's guide is just one example of proposed approaches to climate change disclosure. See also here and here. Canadian companies stay apprised of developments at the Ontario Securities Commission and the other provincial securities regulators.

IBM and Acclimatise identify 10 strategic questions that directors should ask about climate change

IBM and Acclimatise (a UK climate adaptation risk management consultancy) recently release a list of 10 strategic questions that directors must ask about climate change. The list is included in a report that focuses on the actions being taken by the UK FTSE 350 companies to "adapt to a changing climate and build business resilience" (the "Report"). The report was prepared as part of the Carbon Disclosure Project.

The questions are grouped to help companies assess their climate change risks, opportunities, and responses. In the preface to the report, IBM says that it believes "anticipation and competent management of [climate change] risks - and the opportunities they present - will be a source of competitive advantage and be crucial to business success."

As shareholders and securities regulators become increasingly focused on climate change issues, the anticipation and competent management of these risks will also be crucial to discharge the fiduciary duties of directors to the corporation and to comply with environmental disclosure requirements.

The following excerpt begins at page 16 of the Report (© Copyright Acclimatise (Climate Risk Management Ltd) and International Business Machines Corporation, 2009, reproduced with permission):

"YOUR RISKS

1) What are the operational impacts of climate change on your company?

• How are your supply chains and suppliers' operations affected?
• What are the implications for the price, supply and demand for commodities (e.g. agriculture, fisheries, minerals), and services (e.g. water, energy, telecommunications and IT)?
• How will international and internal security threats due to climate change affect your local labour supplies and supply chains?

2) Which of your company's key operating assets are located in areas vulnerable to climate change impacts and what are the implications?

• How long would it take and what costs would be involved to relocate and reconfigure key operating assets?
• What are the implications of depreciating, abandoning or writing-off assets before normal end-of-life?
• How will the value of your asset portfolio change over time?

3) How sensitive is demand for your products and services to climate change impacts?

• How will customer needs, buying behaviour and ability to pay, change and over what timescale?
• What steps have you taken to ensure that your current products and services remain viable?
• What are the implications arising from changes in the demographics of your customer base?

4) How could current and future climate change regulations and industry standards affect your organisation and its reputation?

• What is your level of regulatory and financial exposure to the introduction of prescriptive legislation on adaptation, together with further legislation on urgent mitigation action as the reality of climate change becomes more pressing?
• How effective and auditable is your process for reporting regulatory and policy compliance?
• Which areas of your business are sensitive to media, NGO and local community concerns?

YOUR OPPORTUNITIES

5) What new and enhanced existing products and services can you offer your customers?

• What steps are you taking to develop new or enhanced business opportunities that will provide competitive leadership?
• How will you develop brand stretch to take advantage of changes in customer behaviours and develop climate related markets?
• Can you provide products and services that will help customers predict, monitor, adapt, insure or recover from climate change?

6) What operational benefits could you enjoy from managing your response to climate change?

• How can you improve the attractiveness of your company to investors, banks, credit rating agencies, employees and potential recruits?
• How will you use the current economic crisis as an opportunity and an incentive to revisit your business model and respond to the growing social, environmental and economic challenges?
• What are the cost advantages if you can secure more favourable insurance cover by demonstrating strong operational risk management processes and a responsible climateaware business?

YOUR RESPONSE

7) How clear and effective are your company's internal management responsibilities for climate change and your engagement with stakeholders?

• To what extent are your climate change leadership and management roles clearly defined, supported and empowered?
• How are you sharing knowledge with and informing governments, regulatory bodies, NGOs, and the media to manage and forecast exposure?
• What actions are you taking to ensure that the investment community, your bankers and insurers understand and support the steps you are taking regarding climate risk?

8) How well structured is your company's approach for managing climate change?

• How effective is your process for exploring longer-term scenarios and identifying risks and opportunity signals as they emerge to plan and act accordingly?
• How are you assessing the vulnerability of your suppliers, assets, operations, workforce and markets to changing risks?
• What steps are you taking to ensure that climate-driven business risks and opportunities are embedded into your capital investment and operational expenditure decision-making processes?

9) How can you ensure your company's approach is based on robust information and assumptions?

• How have you integrated the latest available climate science, climate change scenarios to inform your business planning and decisions?
• Are your management information systems for assets, supply chains, operations, markets and customers reporting on and monitoring climate change KPIs using realtime, interconnected and intelligent data?
• Can your information systems provide an early warning of operational risk?

10) How can you demonstrate that your company's climate business resilience plans are realistic and financially viable?

• What actions have you taken to understand and manage future liquidity and ensure sufficient contingency funding?
• How do your business continuity and crisis management plans reflect the changing risk profiles due to climate change and are they well-rehearsed?
• What steps are you taking to involve your employees, implement new technologies, and develop new skills, expertise and cultural change?"

US insurers must report on impact of climate change as of May 2010

Beginning May 1, 2010, insurers operating in the U.S. with annual premiums of $500 million or more will be required to complete an annual Insurer Climate Risk Disclosure Survey. The new regulation was recently adopted by the National Association of Insurance Commissioners ("NAIC"), a coalition of the insurance regulatory officials of the 50 US states. The NAIC said the new rules reflect a concern about "how climate change will impact the financial health of the insurance sector and the availability and affordability of insurance for consumers. This disclosure standard will give regulators the information we need to better understand these risks."

The NAIC describes the new reporting requirements as follows:

"The scope of issues covered by the new disclosure requirement is broad, reflecting the many ways in which climate change will impact the insurance industry. In addition to reporting on how they are altering their risk-management and catastrophe-risk modeling in light of the challenges posed by climate change, insurers will also need to report on steps they are taking to engage and educate policymakers and policyholders on the risks of climate change, as well as whether and how they are changing their investment strategies."

These new U.S. requirements may influence reporting standards in Canada, particularly for insurers that are reporting issuers subject to OSC Staff Notice 51-716 on Environmental Reporting, discussed here.

Google Earth now maps U.S. carbon dioxide emissions

A new high-resolution, interactive map of U.S. carbon dioxide emissions from fossil fuels is now available on Google Earth. The new mapping layer was produced by Project Vulcan, a research initiative led by scientist at Purdue University. Project leader Kevin Gurney hopes that the tool "will bring emissions information into everyone's living room as a recognizable, accessible online experience" (see Purdue news release of February 19, 2009).

The Vulcan layer on Google Earth shows carbon dioxide emissions in metric tons at the state level, county level and per capita. It also breaks down emissions by the different sectors responsible for the emissions, including aircraft, commercial, electricity production, industrial, residential and transport.

While the Vulcan layer currently only shows U.S. fossil fuel-related data from 2002, Project Vulcan reports that "work is underway to complete similar inventories for Canada and Mexico, to include CO and NOx emissions, quantification of all years from 1980 to the present, and incorporate biotic-based fuels." Project Vulcan has been running for 3 years and is primarily funded by NASA and the U.S. Department of Energy.

The project's data was expected to complement data collected by NASA's Orbiting Carbon Observatory, which was to measure levels of atmospheric carbon dioxide from space. However, that $278 million satellite crashed shortly after launch on February 24. It is unclear what effect, if any, the crash will have on the future of Project Vulcan.

CPRB releases climate change disclosure guidance

The Canadian Performance Reporting Board ("CPRB") recently released "Building a Better MD&A: Climate Change Disclosures" (the "Guide"), a guidance document intended to help companies improve their climate change disclosure. The Guide helps to answer some of the questions that have been raised in response to calls from institutional investors and the Ontario Securities Commission for improved disclosure (see our previous posting for additional background).

The Guide helpfully puts the issue of climate change into a business context by noting that climate change may affect the following:

• Business continuity, where a changing climate could interrupt operations;
• Access to capital, where investors are concerned about climate change;
• New capital expenditures, where the economic regulation of greenhouse gases ("GHG") could change the future value of assets;
• Inter-jurisdictional complexities, where regulations vary across the jurisdictions in which the company operates;
• New M&A considerations, where climate change risks and opportunities may affect valuations; and
• Operational costs, including those associated with process changes and regulatory compliance.

The Guide suggests that investors want material disclosure about climate change as it relates to the following:

• Business strategy: What are the implications of climate change for a company's competitiveness? Is climate change a threat, an opportunity or both? What is the company's strategic response to climate change?
• Risks: What are the risks that climate change poses for the business and what are the company's risk management strategies? Risks include physical risks to operations and supply chains, regulatory risks (which may differ across jurisdictions in which the company operates), reputational risks, and litigation risks.
• GHG emissions: If they are significant to assessing the past performance and future prospects of the company, what are the company's direct and indirect greenhouse gas emissions for the period covered by the annual MD&A? Have GHG targets been set? If so, were they met? Emissions data should be expressed both in absolute and intensity (i.e., per unit of production) terms.
• Financial impacts: How have climate change matters impacted financial operations, cash flows and financial condition? What are the future financial implications related to capital and operating expenditures, liquidity, commitments, liabilities or revenues associated with climate change strategies, risks and greenhouse gas emissions? This section in particular should provide the context for financial data that is disclosed by the company.
• Governance: What governance processes and organizational resources has the company assigned to the identification and management of climate change issues?

The Guide reminds companies that climate change disclosure must meet the basic criteria of any other type of corporate disclosure with respect to materiality, continuity of disclosure, and forward looking statements.

Ontario bill proposes mandatory disclosure of energy efficiency of residential buildings

On September 25, Phil McNeely, MPP (Ottawa-Orléans), introduced Bill 101, Home Energy Rating Act, 2008 for first reading in the Legislative Assembly of Ontario. The bill would make home energy audit reports mandatory in three circumstances:

• when applying for a permit to build a new home on or after January 1, 2010;
• when entering into an agreement of purchase and sale for an existing home on or after January 1, 2011; and
• when entering into a tenancy agreement for the lease of a building on or after January 1, 2012.

The audit report requirement would apply only for detached, semi-detached and low-rise residential buildings (with no more than 3 storeys and an area no more than 600 square feet). The report would indicate the energy efficiency of the building in accordance with prescribed methodology and provide any other prescribed information. It is expected that the reports generated under the existing federal ecoENERGY program will be acceptable for the purposes of the bill.

The bill is an example of legislated disclosure requirements related to environmental performance. The purpose of the bill is to enable buyers and renters of residential property to make more informed decisions with respect to the efficiency and environmental impact of their homes.

States turn to courts to reform climate change rules

The US is often criticized for being an overly litigious society. However, that zeal can result in some creative uses for litigation. A prime example is a growing trend, led by the New York's Attorney General Andrew Cuomo, to use lawsuits to spur legal reform with respect to the issue of climate change. The outcome of these lawsuits may have a significant impact on the legal obligations of businesses at the smokestack and in the boardroom - both in the US and here in Canada.

Reuters reported on August 25 that New York and 11 other states commenced a lawsuit against the federal Environmental Protection Agency ("EPA"). The lawsuit alleges that the EPA violated the federal Clean Air Act when it refused to impose new source performance standards on oil refineries, which produce 15% of US carbon dioxide emissions according to the claim. The coalition of states will ask the court to order the EPA to impose such standards to control the emissions of greenhouse gases from the refineries.

The lawsuit follows a decision by the US Supreme Court that the EPA has the power to regulated greenhouse gases. It is one of several state-launched suits against the EPA. Others are intended to force the EPA to regulate greenhouse gas emissions from power plants and automobiles.

If successful, the suits could force the EPA to impose significant restrictions on the greenhouse gas emissions of refineries, power plants, automobiles and potentially other sources. Even if the suits are not successul in the courts, they may prove to be an effective public relations tool for spurring change. Certainly they send a strong signal that many states want to see the EPA and other federal agencies take a more active role in addressing the climate change problem.

The changes prompted by this type of litigation will have an immediate impact on businesses operating in the US. They may also have a knock-on effect in Canada if regulators in the provinces and in Ottawa seek to harmonize Canadian requirements with those of our neighbours to the south.

New York Attorney General Cuomo is also using litigation to force companies to disclose the financial risk that climate change poses to their businesses. Back in September 2007, the Attorney General sent letters and subpeonas to Xcel Energy, AES Corporation, Dominion Resources, Dynegy Inc., and Peabody Energy (all energy companies) demanding information about the companies' analysis of the risk posed by climate change and the disclosure of that risk to investors. The Attorney General was acting pursuant to powers granted under the Martin Act, a somewhat obscure piece of legislation that has been used in recent years to chase Wall Street fraudsters. As reported by the New York Times, New York announced on August 27, 2008 that it had reached an agreement with Xcel Energy. Under the agreement, Xcel will disclose the financial risks of lawsuits and of federal or state court decisions that would affect its business. The company must also analyze and disclose the “material financial risks” associated with global warming. New York continues to negotiate with the other 4 companies.

By using the Martin Act, Attorney General Cuomo was able to take action that the Securities and Exchange Commission ("SEC") has yet to take. The SEC is under pressure both from other levels of government and from the private sector to release guidelines regarding the required disclosure of material environmental risks. (Recall from a previous posting that the Ontario Securities Commission has already started clarifying its expectations with respect to contingent environmental liabilities.)

Companies, both in the US and in Canada, can expect that they wil be under increasing regulatory pressure to consider and disclose the risks posed by climate change. If the litigation trend continues, it may be shareholders who turn to the courts to demand this type of disclosure.

Directors and officers take note: the weather risk market is growing

Mark Twain is credited with saying, "Climate is what we expect, weather is what we get." The difference between what is expected and what actually occurs is the basis for the burgeoning market of weather risk management. Environmental Finance reports that the weather risk market climbed 76% in value last year to a notional value of $32 billion. Some companies have therefore already realized the value of managing weather risk. Prudent directors and officers should be aware that they may be subject to increasing legal obligations to disclose and potentially address such risk.

Weather risk affects businesses in a variety of industries from construction to farming, transportation to power production, clothing retail to outdoor recreation. Businesses that are exposed to weather risk can suffer adverse financial consequences when the weather deviates from expected or historical norms. Weather risk management involves entering into contracts or trading financial instruments that are tied to weather as a way of hedging against the financial effects of unexpected weather.

A simple example, borrowed from the Weather Risk Management Association, is that of a school that must pay for heat during the winter. Assume the school has budgeted for heating based on a historical average winter temperature and has set aside a small reserve for contingencies. If the average temperature in a given winter falls markedly below the historical average, the school could face an unaffordable increase in heating costs. To hedge this risk, the school could pay to enter into a contract whereby the counterparty agrees to pay a certain amount for every degree that the average temperature falls below a set threshold. If the average temperature never falls below that threshold, the counterparty pays nothing and keeps the initial payment made by the school. This strategy may be an affordable way for the school to ready itself for a particularly cold winter. Much more sophisticated weather risk products existing, for example products that bundle weather risk with other related risks and financial instruments that are tied to published weather indexes.

The types of weather risk products described above may seem overly exotic to some directors and officers. However, that does not absolve directors and officers of addressing the issue of weather risk. As discussed in a previous posting, the Ontario Securities Commission is beginning to take a serious look at the way reporting issuers address environmental risks, including weather risk, in their ongoing disclosure documentation. Recall also that one of Canada's most famous disclosure cases, Kerr v. Danier Leather Inc., concerned the disclosure of the unexpected effect of an unusually warm winter on the forecasted sales of leather goods. As the risk posed by weather increases and tools for managing that risk become increasingly available, it is possible that shareholders will hold directors and officers to account not only for disclosing weather risk, but for taking steps to mitigate it.

Is climate change "material"? OSC calls on public companies to quantify their environmental risks

Posted by Andrew Lord

Reporting issuers must improve their disclosure of known and contingent environmental liabilities in continuous disclosure documents. That is the message of the Ontario Securities Commission’s Staff Notice 51-716 on Environmental Reporting (the “Staff Notice”), released February 27, 2008. It is a message that could become relevant not just to companies operating in environmentally sensitive areas, but to any company that faces risk from climate change.

The Staff Notice is discussed in detail in our Davis LLP online bulletin. Most generally, it calls on reporting issuers to provide more detailed discussion and quantitative analysis of their known and contingent environmental liabilities. Improved disclosure of material environmental liabilities must be made in annual financial statements, management discussion and analysis (MD&A), and annual information forms (AIF), as applicable.

The call for improved environmental disclosure has obvious implications for companies with direct involvement in environmentally sensitive industries. However, the Staff Notice is broad enough that any company whose business may be materially affected by climate change, or climate change legislation, may also be required to improve its disclosure. The Staff Notice specifically comments that companies must address material environmental risks generally. Climate change is an environmental risk that can materially affect the performance of a wide variety of industries. It can do so by, for example, altering the production and use of resources that depend on the weather (e.g., grain farming and skiing), leading consumers to choose different types of products (e.g., T-shirts instead of parkas), and creating new markets (e.g., voluntary carbon offsets). The Staff Notice also notes that companies must identify and discuss the financial and operational impact of environmental laws. As discussed elsewhere in this blog, laws designed to mitigate the effects of climate change are evolving rapidly. The imposition of carbon taxes and the implementation of mandatory cap-and-trade greenhouse gas trading systems are legislative changes that could have a profoundly material impact on the financial performance of companies. Both the risks of climate change and the effect of relevant laws may have to be addressed to meet the requirements described in the Staff Notice.

The challenge for reporting issuers is that many of the relevant environmental liabilities, including those posed by climate change, are contingent. Even though the financial impact of such risks may be difficult to predict, the Staff Notice sets a clear expectation that reporting issuers will apply business judgment to quantitative information that is reasonably available to provide detailed discussions and quantified estimates of these risks.

Recent Canadian climate change developments

Submitted by Andrew Lord.

Deloitte released a survey entitled "Managing greenhouse gas emissions: Mitigating risks and uncovering opportunities" (PDF) which considers how Canadian companies perceive and are reacting to the climate change issue in Canada. The report notes that climate change issues are "no longer just for the activists" and are "quickly becoming critical factors for corporate strategy and business competition." Shareholders, both individual and institutional, are increasingly pushing their boards to act on climate change issues. However, the survey found that greenhouse gas management continues to be treated by most corporations as an environmental compliance problem and not as a strategic business opportunity. Respondents cited regulatory uncertainty as the primary barrier to the development of integrated greenhouse gas management programs. The more quickly governments, both domestic and foreign, can eliminate that uncertainty, the more quickly corporate leaders will be able to make climate change a strategic priority rather than a regulatory headache.

Canadian Environment Minister John Baird announced during the UN Climate Change Conference in Bali that Canadian companies must submit their 2006 greenhouse gas emissions data to Environment Canada by May 31, 2008. The data will be used to help implement the Conservatives' climate change plan which aims to reduce emissions by 20% by 2020. Establishing a reliable and complete greenhouse gas inventory is a necessary first step in tracking the effectiveness of Canada's climate change plan. However the plan, which Baird touted as "the toughest plan in Canadian history to clean up our air, tackle climate change, and protect our environment," has been heavily criticized by the opposition parties, NGOs and other world leaders. The 20% figure is measured against 2006 emissions levels, whereas the global standard benchmark is 1990 emissions. Canada's target is therefore much less than the 25-40% reduction that the IPCC recently identified as the minimum level of reductions needed to avoid global warming in excess of 2 degree Celsius. Furthermore, the government proposes to advance its goals in the near term by setting emissions intensity targets. Intensity targets, which cap the level of emissions permitted per unit of industrial production, will not necessarily reduce overall reductions if industrial production continues to growth.

Quebec Environment Minister Line Beauchamp announced that Quebec will adopt California's vehicle emissions standards. BC and Manitoba have also committed to adopt the stringent California standards, which are also being implemented by about 16 U.S. states. Harper and Bush both reject calls for their respective federal governments to follow suit.

Insurers place a premium on climate change

Submitted by Andrew Lord.

With the risk of climate change threatening to swamp the global insurance industry, more and more insurers plan to stay afloat by developing new and innovative products.

Ceres, a coalition of investors and environmental groups, released a report on the insurance industry's response to climate change on October 18, 2007 (see "From Risk to Opportunity: Insurer Responses to Climate Change - 2007"). Authored by Dr. Evan Mills, scientist for the Intergovernmental Panel on Climate Change, the report finds that the insurance industry introduced hundreds of new products and services in 2007 to respond to the risks of climate change. Most of the innovation is occurring in Europe, with the U.S. lagging noticeably behind. While the pace of innovation increased sharply in 2007, only about 1 in 10 insurers are visibly developing climate change related products. Ceres is therefore calling on insurers, particularly in the U.S., to match the scale of their response to the scale of the problem.

The new products introduced in 2007 address the needs of both commercial and individual policy-owners. Around 19 insurers worldwide offer pay-as-you-drive car insurance which tends to reduce driving by 10-15 percent. AIG created a green homeowners property insurance policy. Swiss Re is selling weather-related insurance to small farmers in India. Several insurers are creating renewable energy products to allow policy-holders to participate in the fast-growing emissions credit market.

These innovative products are not the first sign that the insurance industry believes climate change is a real risk. In recent years, insurers have withdrawn policies from over one million U.S. coastal homeowners. However, the effects of climate change will not be restricted to coastal flooding. Some European insurers have even warned that climate change threatens the solvency of the insurance industry (which is the world's largest industry, generating $4 trillion in premium revenue in 2006). Insurers will therefore be forced to continue to innovate - and to put a price on the risk posed by climate change.

The Carbon Disclosure Project: Progress despite government inaction

Submitted by Andrew Lord

Businesses and investors want to do something about climate change, but they need the government to make the market for change.

On Wednesday, October 10, the Conference Board of Canada hosted the Toronto launch of this year's reports of the Carbon Disclosure Project (the "CDP"). The CDP is an annual voluntary survey of FT500 and Canada 200 companies conducted on behalf of 315 institutional investors who manage over USD $41 trillion in assets. Survey respondents not only disclose their greenhouse gas emissions, but also report on their perception of and response to the risks and opportunities presented by climate change. A copy of the CDP Report on the Global FT500 is available here (the Canada 200 Report was not available online at the time of posting).

Jeffrey Simpson of the Globe and Mail was the master of ceremonies for the Conference Board of Trade event. The launch reviewed some of the key findings of the CDP and provided an opportunity for several luminaries to share their thoughts on the issues of carbon emissions disclosure and climate change. Presenters included the following:

• Jeffery Rubin, Chief Economist, CIBC World Markets
• Lynn Patterson, President and Head of Global Markets Canada, Merrill Lynch
• David McCann, Vice-President, Head of Relationship Investments, CPP Investment Board
• Alan MacGibbon, Managing Partner and Chief Executive, Deloitte & Touche LLP
• Paul Dickinson, Chief Executive, Carbon Disclosure Project
• David Greenall, Principal Research Associate, The Conference Board of Canada
• Matthew Kiernan, CEO, Innovest Strategic Value Advisors
• Robert M. Griffin, President and CEO, CSA Group

Several related themes emerged over the course of the launch and are reflected in the CDP reports. First, business leaders and investors are increasingly concerned about the implications of climate change for business. This conclusion resonates with the declaration on October 1 by the Canadian Council of Chief Executives that "climate change represents the most pressing and daunting issue" that the world faces today. Second, putting a price on carbon is the key to addressing climate change in the global economy. As Jeffrey Rubin put it, "price must ration demand." Third, the most effective way to put a price on carbon is for the government to impose a cap on emissions. Once the cap is in place, the market will dictate the price at which the scarce commodity of carbon emissions trades. Finally, in the face of uncertain future regulations, some companies are voluntarily reducing emissions - but most are doing nothing. Mr. Rubin therefore concluded that "what we need is for governments to mandate absolute reductions in emissions now."

Assuming that governments will respond to this call to action, forward-thinking companies must understand where they will stand in a carbon constrained world. One of the most striking conclusions of the CDP Report on the Global FT500 is that there is a huge variation in climate change risk both within and across industrial sectors. Matthew Kiernan therefore characterized climate change not as a peripheral concern, but as a globally transformational issue of competitive advantage. He sees initiatives like the CDP, as well as mandatory disclosure regulations and cap-and-trade systems, as ways of revealing the latent risks and opportunities presented by climate change. As the true competitive landscape is illuminated, investors will reallocate their money accordingly. Prudent companies therefore need to consider the implications of participating in voluntary disclosure initiatives today and the opportunities of preparing for mandatory requirements in the future.