Electric Utilities & Climate Risk Disclosure in SEC Filings: Clearing the Air

Article excerpt

I. INTRODUCTION
II. BACKGROUND
   A. The Emergence of Environmental Disclosures in SEC Filings
   B. Disclosure of Environmental Issues in 10K Filings
      1. 101-General Business Description
      2. 103 Legal Proceedings
      3. 303 Management Discussion & Analysis
   C. Current Means for Voluntary Disclosure
      1. Global Reporting Initiative
      2. Carbon Disclosure Project
D. The Current Outcry for Clarification
      1. Rose Petition
      2. 2006 Multi-State Petition to the SEC
      3. GAO Review of SEC Disclosure

III. ANALYSIS

   A. Current Regional Accords
      1. Regional Green House Gas Initiative
      2. Midwestern Greenhouse Gas Reduction Accord
      3. Western Climate Initiative
   B. Legal Maneuvers to Compel Disclosures
      1. Shareholder Campaigns to Compel Disclosure
      2. Court Battles to Compel Disclosure
   C. Problems with the Current Regulation S-K
      1. Section 101
      2. Section 103
      3. Section 303

IV. RECOMMENDATION

   A. Why Change is Necessary

   B. Abandoning "Materiality" and Embracing Bright Lines
      1. Implications for Section 101
      2. Implications for Section 103
      3. Implications for Section 303

V. CONCLUSION

I. INTRODUCTION

As scientific understanding of global warming develops, the public outcry to reduce man-made climate change will have far-reaching effects on U.S. companies. (1) Regulation of greenhouse gas (2) (GHG) emissions and the demand for enviromnentally friendly technology will impact every sector of the economy. (3) However, some industries will feel the financial impacts of global warming more significantly than others. (4) Industries that produce GHG emissions may be subject to future federal and state regulations mandating emissions reductions. (5) A mandated reduction in emissions may lead to large expenditures to develop the technology necessary to bring such companies into compliance.

Investors are becoming increasingly concerned with their companies' environmental impacts and the effects that enviromnental compliance may have on their companies' finances. (6) In order to make more informed investment decisions, investors are seeking more information on companies' enviromnental risks. (7) Investors are working both within companies to improve internal reporting mechanisms, (8) and with external groups, such as the Securities Exchange Commission (SEC), to improve public reporting on enviromnental issues. (9) As academics and investors work with companies to improve reporting, they have noted a lack of consistency and uniformity in how companies disclose environmental risks. (10) Several large investor groups have petitioned the SEC for clarification in 10K filings--specifically on reporting guidelines--and enforcement of existing reporting guidelines. (11)

Current SEC guidelines are vague and enable inconsistent reporting. This Note examines ways that the SEC can clarify its expectations in 10K filings for more consistent and informative reporting. While environmental risk disclosure guidelines apply across industries, this Note explores ways that the SEC could make clarifications that would benefit companies in the electric industry. Electric utilities are one of the most carbon-intensive industries in the U.S. economy and are therefore most vulnerable to future regulations. (12)

Specifically, Part II of this Note examines the current means for electric companies to voluntarily disclose environmental risks. Part II.D details the most recent requests for clarification on SEC reporting guidelines. Part III analyzes regional accords and the types of information that electric companies have chosen to voluntarily disclose. Part III.B examines legal action taken by shareholders to force company disclosure of environmental risks. Finally, Part IV explains how the SEC can clarify reporting guidelines in 10K filings (13) based on the types of environmental risk information that companies are voluntarily disclosing. …