Do you want to play corporate roulette with global warming?

Imagine the following headline about your company: “First-ever binding and enforceable agreement requiring a company to detail financial liabilities related to climate change.” - Office of Attorney General, Andrew M. Cuomo

For Xcel Energy, an electricity and natural gas company, this headline highlighting government action against them, was a reality late August 2008.

Xcel's executives and those of four other large energy companies were subpoenaed by Cuomo in 2007 for information regarding their disclosures to shareholders in Securities and Exchange Commission filings.

Emissions admission

Due to the large amounts of carbon dioxide emissions from its operations, Xcel found itself a target of the federal government regarding SEC disclosure practices. This is a classic case of risk management failure. Current SEC requirements - including, Items 101, 303, and 503 of Regulation S-K - outline the need to disclose material affects of government regulations, trends, or uncertainties that could materially impact the company, as well as significant risks that could impact operations. While none of these requirements explicitly mention climate change as a risk consideration, companies are increasingly factoring this into their risk assessment process and disclosures. After all, it is reasonable under current conditions to expect future regulations, and therefore, costs associated with the production of large quantities of greenhouse gases (GHG). Prudent
executives should incorporate issues such as their regulatory environment and climate change into their Enterprise Risk Management (ERM) systems.

Environmental matters are important components to a company's Corporate Responsibility (CR) program, and transparent disclosures are critical to shareholders. As defined by the Dow Jones Sustainability Index, this is “a business approach that creates long-term shareholder value by embracing opportunities and managing risks deriving from economic, environmental, and social developments.”

While Xcel Energy published a “Triple Bottom Line Report” to address these issues (download 2007 Triple Bottom Line Corporate Responsibility Roulette. report), and even discusses the actions of a U.S. Senate Committee to propose tough GHG emission standards within the report, it does not address the probable SEC disclosure requirements and associated costs for GHG emission risks in its financial statements.

Lieberman-Warner

As part of Xcel's CR reporting, it attempts to make a statement of its intentions to cut emissions. However, this effort does not tackle transparency and potential financial ramifications, which are a big part of CR and SEC disclosure requirements. If these points were included in its CR program the proposed Lieberman-Warner Climate Security Act, which includes a section directing the SEC to provide a release identifying GHG emissions as a possible material effect and global warming as a “trend,” this would have likely waved a large red flag in its self-assessment.

Even though it has not been enacted, it had strong support and was a clear signal of future regulations. Instead of being pro-active, the company was caught in a public image nightmare and made an example of by the Attorney General. To other companies, this message should be clear from Attorney General Cuomo as he calls it “a new industry-wide precedent that will force companies to disclose the true financial risks that climate change poses to their investors.”

Don't play Roulette with corporate responsibility. Develop a long term strategy including risk assessment and proactive policies for your financial social and environmental “bottom line.” In the current global market, it is crucial to go beyond compliance in order to succeed by creating a robust foundation for the governance of your company.