Thacher Proffitt & Wood LLP AMERICAN BAR ASSOCIATION CLIMATE CHANGE DISCLOSURE: DRAFT ASTM STANDARD NOW AVAILABLE FOR COMMENTS CLIMATE CHANGE AS A “RISK” IN SEC DISCLOSURES Trisha L. Smith December 4, 2008

2 Thacher Proffitt & Wood LLP THE GLOBAL DIMENSION OF “CLIMATE CHANGE”  Not clear how man-made activities contribute to “climate change,” so not clear how to reverse its effects  Emerging global consensus- “Do something or else!”  In spite of scientific uncertainties, “climate change” now has measurable social, economic and political significance

3 Thacher Proffitt & Wood LLP “GOING GREEN” & “GREEN” DISCLOSURES  “Going green” is becoming good business  Publicly-traded companies are under increased pressure to assess and disclose “climate change” risk  No SEC guidance for these disclosures - Not clear “when” companies need to disclose climate change risk, or “how” to make such disclosures  Many companies are making voluntary climate change risk and green disclosures – more attractive to investors and stakeholders

4 Thacher Proffitt & Wood LLP WHY THE UNCERTAINTY REGARDING CLIMATE RISK DISCLOSURES? A REGULATORY BACKDROP  United Nations’ Framework Convention for Climate Change (1992) calls for signatory nations to reduce greenhouse gas (“GHG”) emissions by certain amounts – target date is 2012  United States signed Convention but never ratified, and never joined Kyoto Protocol GHG emission reduction commitments  No federal legislation to reduce GHG emissions  USEPA does not yet regulate GHGs, although 2007 Supreme Court decision directed USEPA to regulate GHGs from new motor vehicles

5 Thacher Proffitt & Wood LLP CONGRESS KEEPS INTRODUCING CLIMATE CHANGE BILLS  In past two years, dozens of bills have been introduced into Congress to address climate change and to reduce GHGs (greenhouse gas emissions)  No bills have passed --- Most are euthanized in committees  In short: GHG emissions that “cause” climate change aren’t regulated at the federal level..... yet...  Industry Consensus: Will be regulated soon!

6 Thacher Proffitt & Wood LLP TWO “GLOBAL WARMING” BILLS OF NOTE (BUT NEITHER PASSED)  Global Warming Pollution Act (S. 309) and Global Warming Reduction Act (S. 485) both required: 1.Disclosure of financial risks re: GHG emissions 2.Disclosure of impact climate change might have on issuer’s interest even if it didn’t emit any GHGs Bills also instructed SEC to issue an interpretive release to clarify disclosure obligations for climate change risks – a “baseline” for a more unified standard Neither bill passed

7 Thacher Proffitt & Wood LLP NO SEC GUIDANCE OR REGULATION YET RE: CLIMATE CHANGE RISK  SEC disclosures are primarily driven by regulatory requirements: Specific SEC regulations Other regulatory landscape that may impact a publicly-traded company’s financial and operational “bottom line”  However, SEC has not yet provided any guidance or regulatory direction regarding how the risk of climate change should be disclosed by publicly-traded companies  Without any SEC guidance or regulations to clarify how climate risk should be disclosed, much uncertainty remains

8 Thacher Proffitt & Wood LLP EMERGING DISCLOSURE STANDARDS THAT MAY LEAD THE WAY  Trade groups such as CERES and The Investor Network on Climate Risk have developed some disclosure guidelines, but have not yet developed specific guidelines relating to the financial impacts of GHG emissions  In a moment, Gayle Koch will discuss how ASTM International is also in the process of developing a disclosure standard for the financial impacts of climate change, which is now in the second subcommittee ballot of a draft standard guide  The developers of these disclosure standards and guidelines hope, among other things, that such standards will help to inform and shape the contours of SEC’s approach to climate change risk in the near future

9 Thacher Proffitt & Wood LLP TWO BASIC INQUIRIES RE: CLIMATE CHANGE AS A DISCLOSURE “RISK”  Without any regulatory guidance, whether and to what extent the risk of climate change should be disclosed comes down to two basic inquiries: 1.Do “line-item” disclosure requirements under Regulation S-K require the disclosure of climate change risks? 2.If a company discloses climate change as a risk, has it thereby “made” such information “material” such that it can be scrutinized for its accuracy and completeness?

10 Thacher Proffitt & Wood LLP LINE-ITEM DISCLOSURE REQUIRMENTS: ITEM 303  Item 303 regulates disclosures in the Management’s Discussion & Analysis (“MD&A”) 17 C.F.R. § (2007) Item 303(a)(1) requires registrants to make disclosures regarding “known trends or uncertainties” that will result in or are reasonably likely to result in a material increase or decrease in liquidity Item 303(a)(3) requires disclosures for “known trends or uncertainties” that a registrant reasonably believes will have a material impact on net sales, revenues or income from continuing operations  Arguably, climate change is a “known trend, event or uncertainty” that is “likely to come to fruition” - Can reasonably be expected to have a material impact on a company in the near future

11 Thacher Proffitt & Wood LLP LINE-ITEM DISCLOSURE REQUIRMENTS: ITEM 101  Reg. S-K, Item 101 regulates the “Description of Business” that a public company must disclose in its SEC filings, and Item 101(c)(1)(xii) requires disclosures regarding the “material effects” that compliance with environmental laws may have on an issuer’s capital expenditures, earnings or competitive position 17 C.F.R. § (2007)  No climate change or GHG emission “laws” with which to comply – yet! (although companies operating in Kyoto signatory countries and some states may be subject to GHG emission regulations)

12 Thacher Proffitt & Wood LLP LINE-ITEM DISCLOSURE REQUIRMENTS: ITEM 103  Regulation S-K, Item 103 provides disclosure guidelines for public companies’ disclosure of “Legal Proceedings.” Climate change litigation has started to emerge, including common law “public nuisance” claims against significant GHG emitters. 17 C.F.R. § (2007)  This in turn may trigger Item 103 disclosure requirements to the extent that climate change litigation constitutes a “material” pending legal proceeding other than “ordinary routine litigation incidental to the business”  A publicly-traded company must accrue a charge for environmental liabilities if it is probable that the liability has been incurred, and if the amount of the liability can be estimated

13 Thacher Proffitt & Wood LLP LINE-ITEM DISCLOSURE REQUIRMENTS: ITEM 503(c)  Reg. S-K, Item 503(c) requires a discussion of risk factors that an issuer considers to be significant, and which make an offering speculative or risky 17 C.F.R. § (c) (2007)  Environmental risk factors might require a discussion of climate change, but it really depends on how the issuer assesses its own operations  Item 503(c) expressly provides that an issuer should not disclose “risks that would apply to any issuer or offering”  E.g., would have to discuss how the perceived risks of a climate change law impacts the issuer specifically

14 Thacher Proffitt & Wood LLP FINANCIAL ACCOUNTING STANDARD NO. 5  Financial Accounting Standard No. 5 (“FAS 5”) requires a publicly-traded company to charge certain material contingent liabilities against current income  A company must accrue a charge for the entire amount of probable and reasonably estimable material contingent liability  If such a liability is “reasonably possible” but the company cannot estimate the amount to be accrued, then the company must disclose the liability in the footnotes to its financial statements  Companies with significant GHG emissions have begun to accrue charges on balance sheets

15 Thacher Proffitt & Wood LLP Line-Item Duty to Disclose: The Bottom Line (at least for today)  Absent a specific “line-item” duty to disclose climate change risk, general view is that publicly-traded companies do not have an affirmative duty to make such disclosures, or to assess climate change impacts on their financial conditions or investment opportunities  However, arguably if “climate change” has a “material” impact to a company, Rule 408(a) of the 1933 Act may require disclosure anyway  Rather circular conundrum for a company

16 Thacher Proffitt & Wood LLP VOLUNTARY DISCLOSURES OF CLIMATE CHANGE RISKS: A SET UP FOR “TOTAL MIX” 10b-5 LIABILITY?  Once the climate change risks are disclosed, has the issuer “made” the risk “material” by disclosing it? What type of information should be disclosed? How far do the disclosures need to go? To what extent has the issuer subjected itself to potential liability under Rule 10b-5 for nondisclosure of material information?  The standard: “Material” if there is a substantial likelihood that the disclosure of the omitted fact would have been viewed by a reasonable investor as having significantly altered the “total mix” of information available. See Chiarrella v. United States, 445 U.S. 222, 235 (1980)

17 Thacher Proffitt & Wood LLP RECENT ENFORCEMENT ACTIONS WHICH MAY IMPACT CLIMATE CHANGE RISK ANALYSIS  Ashland Oil (SEC File No (Nov. 29, 2006): SEC-initiated enforcement proceedings against a company for failure to maintain adequate internal controls and procedures for determining and adjusting environmental reserves set aside to address Superfund cleanup costs  In September 2007, the New York State Attorney General issued subpoenas to five large publicly-traded energy companies, investigating whether information relating to the construction of new coal-fired power plants should have been disclosed in their respective SEC filings

18 Thacher Proffitt & Wood LLP XCEL ENERGY & DYNERGY INC: Landmark Climate Disclosure Agreements with N.Y. Attorney General in 2008  Xcel Energy (August 24 th 2008) & Dynergy Inc. (October 23 rd 2008) Disclosure required re: financial risks –  Present/probable future climate change regulation & legislation  Climate-change related litigation  Physical impacts of climate change Operational disclosures -  Current carbon emissions/ projected increases  Company strategies to offset/reduce/limit/manage GHG emissions  Related corporate governance actions

19 Thacher Proffitt & Wood LLP INDUSTRY SECTORS SHOULD BE PRO- ACTIVE IN DEVELOPING APPROPRIATE DISCLOSURE STANDARDS & GUIDELINES  Private sector initiatives continue to lead the way  For example, the CERES Framework, developed by CERES investor members, consists of four disclosure elements: 1.total historical, current, and projected greenhouse gas emissions 2.strategic analysis of climate risk and emissions management 3.assessment of physical risks of climate change 4.analysis of risk related to the regulation of greenhouse gas emissions

20 Thacher Proffitt & Wood LLP CONCLUSION  Industry sectors, including financial industry, should be proactive and collaborative in developing uniform industry-based guidelines and standards for climate change risk disclosures  The draft ASTM Disclosure Standards that Gayle Koch will now address provide an important and timely opportunity for us to comment on and participate in the shaping of useful disclosure tools