BEFORE THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION California Public Employees' Retirement System California State Controller, John Chiang California State Teachers’ Retirement System California State Treasurer, Bill Lockyer Ceres Environmental Defense F&C Management File No. Florida Chief Financial Officer, Alex Sink Friends of the Earth Kentucky State Treasurer, Jonathan Miller Maine State Treasurer, David G. Lemoine Maryland State Treasurer, Nancy K. Kopp The Nathan Cummings Foundation New Jersey State Investment Council, Orin Kramer, Chair New York City Comptroller, William C. Thompson, Jr. New York State Attorney General, Andrew M. Cuomo New York State Comptroller, Thomas P. DiNapoli North Carolina State Treasurer, Richard Moore Oregon State Treasurer, Randall Edwards Pax World Management Corporation Rhode Island General Treasurer, Frank T. Caprio Vermont State Treasurer, Jeb Spaulding PETITION FOR INTERPRETIVE GUIDANCE ON CLIMATE RISK DISCLOSURE The fundamental principle underlying the Commission’s disclosure requirements is that a public corporation must fully and fairly disclose all facts about its performance and operations that would be material to a reasonable shareholder’s investment decision. Efficient markets depend on the availability of information on corporate strategy, performance, and policies to give investors the insights they need to make investment decisions. Recent scientific, legal, and regulatory developments make it unavoidably clear that the risks and opportunities many corporations face in connection with climate change fall squarely within the category of material information that is required to be analyzed and disclosed in many corporate filings. Yet corporate disclosures of the risks and opportunities created by climate change lag behind these developments, and investors are left with little or in some cases no useful information about corporate exposure to these risks. Investors are responding to this information gap with increasing demand for more and better disclosure on climate risk that will allow them to make informed investment decisions. This petition respectfully requests that the Commission issue an interpretive release clarifying that material climate-related information must be included in corporate disclosures under existing law. The petitioners include a broad coalition of state officials with regulatory, law enforcement, and fiscal management responsibilities; some of the nation’s largest 2 institutional investors; asset management firms; organizations dedicated to fair and effective climate risk disclosure; and conservation organizations dedicated to climate stabilization with hundreds of thousands of members nationwide. A description of each petition signatory is included in Appendix A. 3 TABLE OF CONTENTS Introduction: Climate Change Now Has Material Financial Consequences for Many Corporations. 1. What Is Climate Change? 2. Current Law Requires Corporations to Disclose Material Information About Climate Risk. a. Climate Risk Is Material to Investors’ Decisions. b. FAS 5 and Regulation S-K Require Registrants to Disclose Climate Risk. FAS 5 Regulation S-K Item 101: Description of Business Item 103: Legal Proceedings Item 303: Management’s Discussion and Analysis of Financial Condition and Results of Operations c. Interpretive Guidance Is Needed to Clarify the Application of These Disclosure Requirements to Corporate Climate Risk. 3. What Are the Climate-Related Risks to Publicly Traded Corporations? a. The Changed Regulatory Environment for Greenhouse Gas Emissions. b. The Changing Physical Environment. c. The Impact of Climate Change on Businesses. 4. Climate Risk Is Increasingly Important to Investors. a. Climate-Related Advisory Services, Investment Research, Funds, and Indices. b. Investor Initiatives to Improve Corporate Climate Risk Disclosure. c. International Efforts to Improve Climate Risk Disclosure. d. Climate Risk Disclosure Is Needed to Allow Investors to Fulfill Their Fiduciary Duties. 5. Climate Risk Is Not Being Adequately Disclosed. a. SEC Filings. b. Voluntary Climate Disclosures. 6. The Commission Should Clarify Corporate Obligations to Disclose Climate Risk. a. The Commission Should Issue an Interpretive Release Clarifying the Application of Existing Law to Climate Risks and Setting Forth the Elements of Climate Risk Disclosure. b. Complying with Climate Risk Disclosure Requirements Will Not Be Unduly Burdensome. c. The Commission Should Provide the Requested Guidance Promptly. 4 Appendix A: Petition Signatories Appendix B: The Science of Climate Change Appendix C: Regional and State Regulatory Actions Concerning Greenhouse Gas Emissions Appendix D: Nationwide and International Regulation of Greenhouse Gas Emissions Appendix E: Federal Legislation Related to Climate Change Pending in the 110th Congress Appendix F: Business Leaders’ Comments on Climate Change Regulation and Disclosure Appendix G: Key Elements of Proposed SEC Guidance on Climate Disclosure 5 Introduction: Climate Change Now Has Material Financial Consequences for Many Corporations. The empirical evidence that human activities are changing the global climate in significant ways, and at an accelerating pace, is now overwhelming. The Fourth Assessment Report released earlier this year by the Intergovernmental Panel on Climate Change (IPCC) reviewed and synthesized the state of knowledge in climate change science. The IPCC concluded that evidence of the warming of the climate system is now “unequivocal” and that “numerous long-term changes in climate have been observed.”1 The IPCC’s research also shows how climate change is affecting societies, economies and natural systems in the United States and throughout the world. The findings of the Fourth Assessment Report are described briefly below, and are further discussed in Appendix B to this petition. A growing recognition that effective measures to reduce greenhouse gas emissions must happen very soon, if the most severe harms associated with climate change are to be averted, has prompted the adoption of comprehensive and mandatory programs to limit greenhouse gas emissions in many other countries. Such policies apply in large and populous regions and states in this country as well as in most of Europe. This enormous body of new law has important implications, even for companies not directly subject to regulation, because these initiatives govern sectors like electric power and transportation, on which entire economies depend. New legal obligations relating to greenhouse gas emissions are described in Part 3a, below, and in Appendices C (state regulation) and D (international regulation). In just the last few months, all three branches of the federal government have taken actions that emphasized the urgency of climate change and its newly central place in public policymaking. See infra Part 3.a (discussing federal administrative policies and Massachusetts v. EPA, 127 S. Ct. 1438 (2007)); Appendix E (enumerating climate legislation pending in Congress). In response to these developments, many business leaders now recognize the economic and financial risks associated with climate change, the enormous opportunities presented by the shift to a carbon-constrained economy, and the pressing need for a comprehensive national climate change policy. Appendix F compiles a small sampling of the many recent statements 1 See INTERGOVERNMENTAL PANEL ON CLIMATE CHANGE, Summary for Policymakers, in CLIMATE CHANGE 2007: THE PHYSICAL SCIENCE BASIS 5, 7 (2007) [hereinafter IPCC, SPM-1], available at http://ipcc-wg1.ucar.edu/wg1/Report/AR4WG1_Print_SPM.pdf. 6 from corporate leaders on the importance of climate change as a market force and the inevitability and need for national greenhouse gas controls. Climate change has far-reaching implications for business. The term “climate risk” includes effects on a company’s performance and operations that range from physical damage to facilities, to new regulatory costs and incentives, to shifts in the market for products or services. The influence of climate change and greenhouse gas regulation on particular companies varies, but it is increasingly clear these developments have already had material effects on many companies’ performance and operations, and that those impacts will increase as the climate continues to change. The days are long past when climate risk can be treated as a peripheral or hypothetical concern. Companies’ financial condition increasingly depends upon their ability to avoid climate risk and to capitalize on new business opportunities by responding to the changing physical and regulatory environment. Climate change has now become a significant factor bearing on companies’ financial condition. For many companies, climate risk is material and subject to mandatory disclosure under traditional principles of the securities laws and the Commission’s regulations. To date, however, disclosure of climate risk has been scant and inconsistent. In periodic reports filed pursuant to the Commission’s disclosure regulations, many corporations have taken the position that any risks associated with climate change are too uncertain and remote in time to be material to their performance. The rapidly changing regulatory environment makes clear that this position is no longer sound. Moreover, companies whose assets are expected to last for decades must deal with changes—such as sea-level rise, increasingly severe weather, greater incidence of floods, fires, and droughts, and expanded ranges of disease and