Law and the Environment

Guest Column on EnergyLaw360

I recently published a guest column on EnergyLaw360 entitled Laws Set Stage for Carbon Trading Opportunities.  The article discusses the new federal greenhouse gas emissions reporting law that was enacted and how EPA must publish final rules by September 2009.  These rules will serve as the foundation for coming climate change legislation that will create a cap-and-trade system for regulating greenhouse gas emissions, and create significant opportunities in developing greenhouse gas emission reductions that can be monetized in the form of carbon credits.

Will New ASTM Standard for Assessing Vapor Intrustion Wreak Havoc on Phase I Environmental Site Assessment Process?

Sitting at a Starbucks at in Dallas, Texas, I'm looking North at a Chevron-branded station owned by TETCO.  This is clearly noted on the sign with regular gasoline at $3.19 per gallon.  Clearly I am sitting downhill from the station, and if my client were buying the shopping center, my first suggestion would be testing the groundwater to see if the underground storage tanks containing various grades of gasoline or diesel below the gas station/convenience store have leaked and contaminated the property--under the Starbucks.  When I visit this site after dropping my daughter at school, I see the capped groundwater monitoring wells.  I would venture a guess that the hundreds of people who walk over or park on top of them have no idea what they are?  The two charming elderly women sitting outside the women in front of me have no idea that their may be gasoline and diesel 10 or 20 feet below their feet.  In reality, they probably have no reason for concern.  But a new standard for assessing risk from vapors from soil and groundwater may create havoc for real estate developers and banks.

Thinking about these issues is no different from any day in the office as an environmental lawyer.  (The "office" having grown with laptops, Blackberries, and cell phones to be about anywhere I am, ergo sitting in Starbucks with my T-Mobile connection blogging about an environmental issue--the mobile environmental lawyer.) Tanks leak.  Piping leaks.  People drive off and pull of the hose dispenses or otherwise spill fuels.  This is nothing new and has been going on for decades.  What is new is an ASTM standard for assessing the risk that those chemicals in the soil and groundwater are turning into vapor and getting into a building?  Could this new standard wreak havoc on the Phase I environmental site assessment process?  Could it be that I'm breathing benzene as I sit here typing this message?

It's actually unlikely.  My toxicologist friends working who work with me to assist clients in advising clients who remediate contaminated sights say it is highly unlikely in most instances.  In fact, they tell me it is when you fill up your car that you get your biggest shot of benzene--a known human carcinogen. 

So why the ASTM standard for assessing these risks if in fact they are so unlikely?  In the environmental regulatory world I live in as a corporate environmental lawyer since I graduated from Harvard Law School over 20 years ago, the regulatory agencies have begun to focus on these issues.  Yes, primarily in California, where all environmental regulatory programs tend to start (California has enacted and will be implementing a climate change greenhouse gas program before the Congress passes a bill), and the Texas environmental agency has not really tackled this issue and does not necessarily require that it be assessed.  Reportedly, the California agency is going back to sites closed under old rules that did not require vapor intrusion analysis and requiring that the sites be re-examined.  EPA has issued guidance documents on the subject of vapor intrusions and how to test for it.

As regulatory agencies and scientists begin to look at vapor intrusion into buildings, these issues have come up in real estate transactions in many parts of the country.  Real estate developers, real estate investment trusts, and banks then start to ask questions and the environmental lawyers and environmental consultants that work for them in their transactions start to ask questions.  Is vapor intrusion a problem?  What are the concentrations of chemicals in buildings that may arise from human sources in the ground (in soil and groundwater)?  Do such concentrations present a risk to people who work, live, visit these buildings?

The new ASTM standard is titled "Standard Practice for the Assessment of Vapor Intrusion into Structures on Property Involved in Real Estate Transactions" (E-2600-08). Roger Smith of Weston in Dallas provided this summary of the Standard.

The standard provides for a tiered approach to assessing and mitigating vapor intrusion conditions (VICs):

Tier 1

– Screening Level Assessment conducted with information typically gathered for a Phase I ESA (current and previous property use, location relative to potential sources, etc.) to decide if a potential vapor intrusion condition (pVIC) is present. It would make sense to include a request for a E 2600-8 Tier 1 VI screening level assessment along with the standard ASTM E1527 Phase I ESA. Since the assessment is based to a large degree on information gathered for the Phase I, there should be little additional cost associated with the screening levels assessment.

Tier 2

– Screening Level Assessment conducted by comparing information typically gathered in a Phase II ESA (soil and groundwater analytical data) to risk-based concentrations (look-up values) to decide if a pVIC is present. The Tier 2 VI assessments will mostly likely be requested whenever a standard Phase II ESA is requested. Since this is comparison to look-up values, there should be little additional cost associated with the Tier 2 screening level assessment.

Tier 3

– Vapor Intrusion Condition Assessment using modeling, soil gas samples, sub-slab vapor samples (from within buildings), and/or indoor air samples to decide if a VIC is present. This would be conducted when it has been determined that a pVIC is present that could affect current or future development on the property. The least expensive approach is likely to be modeling using existing data. This is typically a very conservative approach that may overestimate the risk of a VIC. If additional sampling is needed, the cost for conducting a VI assessment would typically be less than the cost for a Phase II assessment of the property.

Tier 4

– Vapor Intrusion Mitigation by building design, institutional controls, or engineering controls (removal of source, barriers, or mitigation systems). The scope and cost would be highly variable for Tier 4. For new construction, all three options are available. For existing construction, you are typically looking at the options for engineering controls.

The Standard is dense and may cause insomnia for even an environmental lawyer or consultant, but it does have potential implications for real estate transactions.  While it is not a part of the Phase I Site Assessment Standard which is used on almost all commercial real estate transactions, it is an add on to this standard.  It may in time become a standard practice to evaluate soil vapor intrusion.

If this happens, it may raise new issues and confusion in the commercial real estate market.  Banks will be unfamiliar with it and may be skiddish about chemical vapors and buildings.  What we need is to try to educate the real estate and banking industry about these issues.  While it will take time, it may be important not to scare off buyers and banks over vapor intrusions.

First, real risks may be rarely found.  The concentrations necessary to create a risk to workers in office buildings and industrial or warehouse settings are probably going to be rare.  People may need to work in buildings for 20 or 30 years, which is rare these days.  For residences, the concentrations are probably rarely going to raise a concern.  Second, for new buildings a vapor barrier can be constructed to prevent vapors from entering structures.  For old buildings, steps can be taken to vent the vapors.

Environmental assessments have become a standard practice in the real estate industry.  If vapor intrusion assessments become more commonly a part of those assessments, we need to be sure they don't become a source of undue alarm.  As commercial real estate faces the collateral damage of the subprime mortgage debacle, we need to take care that a new environmental concern and potential risk does not hamper transactions and the health of the market.  Understanding the scientific realities and real risk analysis is the first step in this process. 

Climate Change Risk Highest Concern According to Survey of Insurance Industry Analysts

A recent survey conducted by Ernst & Young and Oxford Analytica shows that Climate Risk is the biggest concern among insurance industry analysts.  According to the Ernst & Young description, the research report sought the views of more than 70 analysts from around the world. They came from over 20 disciplines that shape the business environment, including: law, finance, the sciences, business strategy, geopolitics, regulation, medicine, economics, and demographics. They were drawn from 12 of the world’s most important sectors: asset management, automotive, banking and capital markets, biotechnology, consumer products, insurance, media and entertainment, oil and gas, pharmaceuticals, real estate, telecommunications, and utilities. Interviews were open ended and no predetermined list of risks was used. Each analyst was asked for his or her own evaluation of the most important strategic challenges facing global businesses.

The top ten risks are:

1.         Climate change: long-term, far-reaching and with significant impact on the industry.

2.         Demographic shifts in core markets: offers business opportunities but risk that other sectors will capitalize first.

3.         Catastrophic events: rising costs and serious impact on earnings for insurers.

4.         Emerging markets: risk and opportunity but competitive threat from new players.

5.         Regulatory intervention: increased scrutiny impacting on operations and practices.

6.         Channel distribution: technology is changing the way insurance is sold and purchased.

7.         Integration of technology with operations and strategy: an enabler to keep pace with competition but lack of integration is a threat at the strategic business level.

8.         Securities markets: changes in capital providers and the way capital is entering the insurance industry are causing major changes in the industry.

9.         Legal risk: significant and unexpected change in the legal environment, such as government legislation or evolving case law, will continue to have a critical impact on the insurance industry.

10.       Geopolitical or macroeconomic shocks: likely causes unknown but consequences potentially severe.

Pension Funds Reach Agreement with Dynegy to Disclose Climate Risks by the End of the Year

Two of the largest pension funds have forced Dynegy Inc., to agree to report on climate risk by the end of this year, and how the company will address this risk.  The California State Teachers' Retirement System and North Carolina Retirement Systems, both of which owned substantial shares in the company, filed a shareholder resolution with Dynegy in January to require the company to report on the feasibility of adopting specific greenhouse gas reduction goals for its existing and proposed power plants.

In exchange for an agreement by Dynegy to make the report, the two pension funds withdrew the resolution.  Dynegy is apparently developing a plan to disclose climate change information to its shareholders, which likely will include the company’s annual greenhouse gas emissions, as well as a plan for mitigating those emissions.  The mitigating steps may include purchase of greenhouse gas offsets or carbon credits.

At the same time, Dynegy is planning to construct coal-fired power plants in Arkansas, Georgia, Iowa, Michigan, Nevada and Texas. Two plants are under construction in Arkansas and Texas.

This development indicates a growing capability of institutional investors to force climate change disclosure from major companies.

Lieberman-Warner Climate Security Act Bill Contains Climate Risk Disclosure Provision

As companies prepare for their SEC filings and issuance of annual reports the question of climate risk disclosure becomes an issue to consider. With the events and rapid developments in the courts, states, Congress, and in Bali, companies may find it of particular importance this year to review their environmental disclosures for potential additional statements about climate change and greenhouse gas regulation. Of course, this will depend on their business and the location of their facilities.

What is important to consider is the fact that three separate climate change bills filed in Congress call for the SEC to issue an interpretive release, including the Lieberman-Warner Climate Security Act, that was the first climate change bill voted out of the Environment and Public Works Committee.  This bill may be considered by the full Senate in 2008.

The text of the climate risk disclosure provision, similar to provisions in two other Senate climate change bills, is found in Section 9002 of the Climate Security Act, S. 2191, and is set forth below:

(a) Regulations- Not later than 2 years after the date of enactment of this Act, the Securities and Exchange Commission (referred to in this section as the `Commission') shall promulgate regulations in accordance with section 13 of the Securities Exchange Act of 1934 (15 U.S.C. 78m) directing each issuer of securities under that Act, to inform, based on the current expectations and projections and knowledge of facts of the issuer, securities investors of material risks relating to--

(1) the financial exposure of the issuer because of the net global warming pollution emissions of the issuer; and

(2) the potential economic impacts of global warming on the interests of the issuer.

(b) Uniform Format for Disclosure- In carrying out subsection (a), the Commission shall enter into an agreement with the Financial Accounting Standards Board, or another appropriate organization that establishes voluntary standards, to develop a uniform format for disclosing to securities investors information on the risks described in subsection (a).

(c) Interim Interpretive Release-

(1) IN GENERAL- Not later than 1 year after the date of enactment of this Act, the Commission shall issue an interpretive release clarifying that under items 101 and 303 of Regulation S-K of the Commission under part 229 of title 17, Code of Federal Regulations (as in effect on the date of enactment of this Act)--

(A) the commitments of the United States to reduce emissions of global warming pollution under the United Nations Framework Convention on Climate Change, done at New York on May 9, 1992, are considered to be a material effect; and

(B) global warming constitutes a known trend.

(2) PERIOD OF EFFECTIVENESS- The interpretive release issued under paragraph (1) shall remain in effect until the effective date of the final regulations promulgated under subsection (a).

This provision has not become law, but the SEC is currently reviewing a petition filed by various state pension funds and other socially conscious investors and environmental groups, asking for the SEC to issue an interpretive release to provide guidance for companies and to require climate risk disclosure.  Whether this provision becomes law or the SEC independently adopts an interpretive release, the demand for climate risk disclosure in Congress and a significant part of the institutional investment community suggests that corporations that may be impacted by future greenhouse gas emission regulation should evaluate their corporate strategy regarding climate risk disclosure.

Climate Change Disclosure Heats Up: Environmental Groups and State Pension Funds File Petition with SEC for Greater Climate Change Disclosure

Perhaps these two events were coordinated, but within a short time after the Attorney General of New York sent subpoenas under a New York securities statute to five utilitiy companies seeking information on climate change disclosure by those companies, particularly with respect to coal-fired power plants, CERES and various environmental groups and state pension funds filed a petition with the SEC seeking a rulemaking requiring greater climate change disclosure.   The press release from CERES is set forth below.

(Washington - September 18, 2007) -- A broad coalition of investors, state officials with regulatory and fiscal management responsibilities, and environmental groups today filed a full petition asking the Securities and Exchange Commission (SEC) to require publicly-traded companies to assess and fully disclose their financial risks from climate change. Also today, the coalition formally asked the Commission's Division of Corporation Finance to immediately begin "[c]losely scrutinizing the adequacy of registrants' climate disclosures" under existing law.

In addition to Environmental Defense and Ceres, the 22 petitioners include leading institutional investors in the U.S. and Europe managing more than $1.5 trillion in assets. The signers include the California State Treasurer Bill Lockyer, Florida Chief Financial Officer Alex Sink, Maine State Treasurer David G. Lemoine, New York State Comptroller Thomas P. DiNapoli, North Carolina State Treasurer Richard Moore and Oregon State Treasurer Randall Edwards, as well as New York State Attorney General Andrew M. Cuomo.

The first-of-its-kind petition cites unequivocal scientific evidence, far-reaching regulatory developments and extensive business recognition that the risks and opportunities many corporations face in connection with climate change are material to shareholder investment decisions and must be disclosed under existing law.

"Smart companies know that profits and jobs come from solving problems, not ignoring them. Investors have a right to know who is paying attention," said Fred Krupp, president of Environmental Defense.

"The SEC needs to do more to protect investors from the risks companies face from climate change, whether from direct physical impacts or new regulations," said Mindy S. Lubber, president of Ceres and director of the Investor Network on Climate Risk. "Shareholders deserve to know if their portfolio companies are well positioned to manage climate risks or whether they face potential exposure."

"Our marketplace cannot properly function, our retirees' pensions cannot be protected, unless investors' right to know is fully enforced," said California State Treasurer Bill Lockyer, a board member of California's Public Employees' Retirement System (CalPERS) and State Teachers' Retirement System (CalSTRS), which collectively manage more than $400 billion in assets. "We're asking the SEC to vindicate that right so investors can ensure their portfolios reflect the risks and benefits related to climate change."

"Action by the SEC on this petition would result in better, more informed decisions for Florida's investors," said Florida Chief Financial Officer Alex Sink, who serves on the board of the Florida retirement system which has $140 billion in assets.

Climate change can affect corporate performance in ways ranging from physical damage to facilities and increased costs of regulatory compliance, to opportunities in global markets for climate-friendly products or services that emit little or no global warming pollution.Those risks fall squarely into the category of material information that companies must disclose under existing law to give shareholders a full and fair picture of corporate performance and operations, the petition says.

The petition asks SEC to clarify that, under existing law, companies must disclose material information related to climate change. Depending on the circumstances, this obligation may require disclosure of the following information:

• Physical risks associated with climate change that are material to the company's operations or financial condition;
• Financial risks and opportunities associated with present or probable greenhouse gas regulation;
• Legal proceedings relating to climate change.

Despite a groundswell of demand from investors for more information in climate risks, corporate disclosure has been scant and inconsistent. Exxon Mobil Corporation, the world's largest petrochemical enterprise, included only one cursory reference to climate change in its entire 2006 annual filing with the SEC. Allstate Corporation, which insures 1 in 8 homes in the U.S. and reported over $4 billion in losses from Hurricanes Katrina and Rita, did not mention climate change at all in its latest annual filing. A January 2007 study published by Ceres and the Calvert Group, an asset management firm, found that more than half of the companies in the S&P 500 Index are doing a poor job disclosing climate change risks to their investors. Companies in sectors with low greenhouse gas emissions, including insurance companies and banks, had especially poor disclosure.

Poor disclosure prevents investors from getting the full story. Full disclosure by Texas utility TXU on its potential exposure from climate change-related risks would have revealed the extensive financial exposure resulting from the company's proposal to build 11 new coal- fired power plants without limitations on the extensive global warming pollution. TXU's business plan would have increased carbon dioxide emissions 78 million tons annually, and invested considerable capital in long-term high-polluting resources. Investors are entitled to a rigorous assessment of regulatory and financial risks related to climate change so they can evaluate which business plans are reckless and which
are prudent in managing these risks.

The petitioners today also called on the Commission to take immediate action on corporate climate disclosure as it develops the new guidance. The petitioners called on the SEC's Division of Corporation Finance to devote close attention to the adequacy of climate risk disclosures under existing regulations. Because the obligation to disclose climate related risks and opportunities exists under current law, the Division of Corporation Finance "need not and should not wait" in immediately increasing "its scrutiny of the adequacy of climate risk disclosures in corporate filings."

The petitioners were as follows:

California State Controller, John Chiang
California Public Employees' Retirement System
California State Teachers' Retirement System
California State Treasurer, Bill Lockyer
Ceres
Environmental Defense
F&C Management
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 State Treasurer, Frank Caprio
Vermont State Treasurer, Jeb Spaulding

Valero Settlement in Excess of $200 Million with EPA over Clean Air Act Issues Demonstrates Importance of Envirionmental Compliance Assessment, But Also Environmental Disclosure Due Diligence

In a case demonstrating the critical value of appropriate environmental due diligence into not only the potential for liability for releases of contaminants, pollutants, and hazardous substances into soil and groundwater, but the environmental management systems and environmental compliance of target companies in mergers and acquisitions, Valero agreed to a settlement by which it would pay a multi-million dollar penalty and over two hundred million dollars to install air pollution control equipment.  Valero purchased the refineries in question from another company in 2005.  In mergers and acquisitions, particularly those involving refineries, the potential costs to address air emissions issues are enormous.  Thus, extreme care should be taken in evaluating the compliance status of the refineries with New Source Review, Prevention of Significant Deterioration, Title V Permitting, the Clean Air Act and the regulations promulgated under the Act, and similar state statutes and regulations.  Care should also be taken to ensure that any emission offsets that are or may be required are available for purchase and that the cost of the emission reduction credits is understood.

The value of environmental disclosure due diligence can be demonstrated by this case.  Reviewing the prior company's disclosures and the internal controls used to identify and value environmental capital cost expenditures, predicted future potential expenditures, and environmental liabilities, coupled with the environmental compliance assessment, would allow the acquiring company, and if analyzed and reported properly to them, management and the board of directors, to adequately evaluate the acquisition and its impact on the disclosures that may be required under securities laws to shareholders at the time of acquisition or subsequent to acquisition, if the impact of the environmental liabilities or capital costs of the target company would be material to the acquiring company.

In the context of today's voluntary reporting on environmental and sustainability issues, public companies should take care in terms of the statements that are made regarding environmental compliance or management systems and efforts to protect the environment.  The acquisition of new companies or facilities could affect how the accuracy of those statements are perceived.

For more discussion of these issues please review my previous posts on Environmental Disclosure, the SEC case against Ashland regarding environmental disclosure, and Environmental Corporate Governance.

WASHINGTON, Aug. 17 /PRNewswire-USNewswire/ -- The Department of Justice and the U.S. Environmental Protection Agency have reached an agreement with Valero Energy Corp. that provides for a $4.25 million penalty and $232 million in new and upgraded pollution controls at refineries in Tennessee, Ohio and Texas that were formerly owned by Premcor Inc. The state of Ohio and Memphis-Shelby County, Tenn. have also joined in today's consent decree and will receive a portion of the civil penalty.

The agreement requires new pollution controls to be installed at refineries in Port Arthur, Texas; Memphis, Tenn.; and Lima, Ohio, that, when fully implemented, will reduce annual emissions of nitrogen oxide by more than 1,870 tons per year and sulfur dioxide by more than 1,810 tons per year. The new controls will also result in additional reductions of carbon monoxide, volatile organic compounds and particulate matter from each of the refineries. These pollutants can cause serious respiratory problems and exacerbate cases of childhood asthma.

"This Consent Decrees continues the commitment of the Department of Justice to assure that all refineries in the United States are in compliance with the Clean Air Act, said John C. Cruden, Deputy Assistant Attorney General for the Justice Department's Environment and Natural Resources Division. "This settlement, which was done in conjunction with state and local governments, requires new pollution abatement equipment, reduces air pollutants by a significant amount, obtains a meaningful penalty, and secures important environmental projects for the impacted communities."

"Valero committed to spend more than $200 million  in upgrades, which will reduce emissions of harmful air pollutants by several thousand tons per year," said Granta Nakayama, assistant administrator for EPA's Office of Enforcement and Compliance Assurance. "Today's settlement is good news for people living near these refineries; local residents will be able to breathe easier knowing that the air in their communities will be cleaner."

The settlement requires an additional $1.6 million to be spent on the following projects serving the Port Arthur, Texas community:

$1 million to support a local health center serving under and un-insured residents of the Port Arthur area, for the diagnosis and treatment of asthma and other respiratory illnesses that may be caused or exacerbated by air pollution. A mobile air monitoring van for the Local Emergency Response Commission. "Shelter-in-place" air control systems at the Booker T. Washington Elementary and Memorial 9th Grade Center schools to detect, isolate And filter air pollution that may result from emissions in the Port Arthur area. A project to replace existing high-emitting water heaters with new low-emission water heaters in low-income residences in the Port Arthur area.

Additional supplemental projects will be performed in the communities near the Lima and Memphis refineries, such as the installation of equipment on municipal diesel trucks and buses to reduce particulate and ozone-forming emissions, and the installation of new equipment to control wastewater treatment plant odors. Projects to further reduce "fugitive" and unregulated emissions from refinery equipment are also being undertaken at each of the three refineries covered by today's agreement.

This settlement is part of the EPA's national effort to reduce air emissions from refineries. Through federal settlements such as the one reached today, approximately 84 percent of domestic refining capacity is now operating under pollution reduction agreements. Including the settlement with Valero, 89 refineries located in 26 states across the nation are now under agreements to address environmental problems and to invest over $4.7 billion in new pollution control technologies.

The three refineries covered by today's settlement produce more than 650,000 barrels of oil per day, representing nearly four percent of domestic refining capacity in the United States.

The refineries were previously owned by Premcor and purchased by Valero in late 2005. In June 2005, before Valero acquired Premcor, a similar settlement was reached with Valero that addressed the refineries it owned at that time. Under that agreement, Valero committed to spend at least $700 million at 14 refineries nationwide.

Today's agreement was lodged in the U.S. District Court for the Western District of Texas and is subject to a 30-day public comment period and final court approval. A copy of the consent decree is available on the Department of Justice Web site at http://www.usdoj.gov/enrd/Consent_Decrees.html.

U.S. Environmental Protection Agency

CONTACT: U.S. Environmental Protection Agency, ENRD +1-202-514-2007, EPA+1-202-564-4355, TDD +1-202-514-1888

Web Site: http://www.usdoj.gov/

More CFOs Taking on Responsibility for Managing Non-Financial Risk

A report published by IBM Business Services entitled "Thinking Through Uncertainty:  CFOs Scrutinized Non-Financial Risk," a trend is identified showing that CFOs are taking on more and more responsibility to evaluate company non-financial risk.

The report concludes as follows:

"At the large U.S. companies interviewed for this research, the traditional wall between financial and non-financial risk is breaking down. These companies have begun to take a broader view of risk, and are creating an ongoing, unified internal discourse about all forms of risk, both financial and non-financial.

In the process, the finance function is often tasked with finding new ways to assess the impact of events in non-financial areas on business performance. The finance function typically has the best resources with which to view and assess the entire company, and so is naturally positioned to orchestrate if not lead these enterprise-wide efforts. CFOs are adding risk assessment and management responsibilities to their already expanding portfolio of strategic tools they contribute to successful business performance."

As environmental risk management and environmental disclosure converge as related risks companies must address, the CFO may become increasingly involved in managing or evaluating environmental risks companies face and, thus, may have a better understanding of the need to account more completely for and disclose environmental risks and liabilities.  Climate change risks and potential disclosure obligations raise complex risk issues CFOs may be required to manage.

Former CFO of Safety-Kleen Pleads Guilty to Securities and Fraud Charges

Paul Humphreys, the former CFO of Safety-Kleen, has pleaded guilty in federal court on today to securities and bank fraud charges arising from a scheme to overstate earnings from 1998 through 2000.  He faces up to 45 years in prison and $2.25 million in fines. The fraud was part of an attempt to meet earnings targets the company had predicted at the time Safety-Kleen was acquired by Rollins Environmental Services in 1998. 

For the more complete story see CFO.com and the complaint filed by the SEC in the United States District Court for the Southern District of New York.

Australian Article Reports Company Frustration That Investors Are Not Valuing Their Reductions in Carbon Emissions

The article below from the Herald Sun discusses concern of certain Australian companies that their actions ahead of a carbon cap-and-trade system in Australia to reduce their carbon emissions has not been recognized by the markets and investors.  The article suggest not only the potential of the market to not fully recognize and appreciate the risk from carbon or greenhouse gas emission limitations, but suggests actions take to reduce carbon emissions in preparation for climate change legislation may not be appreciated by the market as yet.  This throws a new wrinkle in the issues relating to environmental governance and disclosure in the sense that companies are usually worried about the need and effect of disclosing risks from carbon emissions and climate change regulation.  Here the issue is not the failure to disclose or the concern of a reduction in stock price because of carbon exposure, but the concern that proactive steps have not been reflected in an increase in stock prices.

The global warming debate may be in from the cold in Australia, but some companies are accusing the share market of freezing them out with sluggish attitudes to climate change liabilities.

More than a fortnight after the Federal Government gave carbon emissions trading the nod, brokers and fund managers are being described as too slow to value the upside of listed companies that have taken steps to minimise climate change risks to their earnings.

"A number of organisations cannot understand why the market is refusing to factor these initiatives into share prices," Joanne Saleeba, chief executive of Investor Group on Climate Change, told BusinessDaily. ASX rules prevent these companies from speaking on the record about some aspects of their share prices. But Ms Saleeba said behind the scenes there was a growing frustration among companies that have implemented carbon reduction programs in recognition that global warming carries risks to investor returns.

Origin Energy communications chief Tony Wood told BusinessDaily that he had seen no evidence of the market factoring in the $40 million worth of investments Origin has made in solar sliver technology.

Origin, whose other investments include gas-fired generators, geothermal technology and some hydro-electric interests in New Zealand, believes the Australian share market has proved it is sceptical about the earnings potential of clean energy.

Greg Pritchard, finance director at Energy Developments - one of the largest listed renewables companies - said the group's power generation from coal mine, methane and landfill gas sites around the world had helped it offset about nine million tonnes of emissions.

"When carbon trading starts here in 2012, this will become a valuable part of our balance sheet," Mr Pritchard said.

But not everyone believes the market should wait four years to put a value on abatement.

"These efforts are being overlooked by the market and it is very frustrating for companies leading the charge into an era of carbon restraint," said Ms Saleeba, whose organisation represents institutions with $225 billion of funds under management.

The group's membership includes AMP Capital Investors, Babcock & Brown, BT Financial Group, Colonial First State and Goldman Sachs JBWere.  It was established two years ago to bring to the market's attention the fact that big investors viewed climate change liabilities as a serious risk to the earnings of companies.  Those risks are divided into five categories: regulatory, physical, litigation, competitiveness and reputation.

Goldman Sachs JBWere head of quantitative research Andrew Gray said there was a "disconnect" between companies that had advanced their business strategies to address these risks and stockbrokers and fund managers that were not reflecting this in their analysis.

"When you consider that many institutional investors have for years taken climate change risk seriously, the disconnect becomes more pronounced," Mr Gray said.

Part of the problem lies in the fact that the federal government is yet to set carbon emissions targets and decide how permits will be distributed.

The uncertainty makes it too difficult for researchers to make a call, according to Dr Ian Woods, senior research analyst at AMP Capital Investors.

He acknowledged that institutions were years ahead of the market on the issue.

"We have been looking at how well companies plan for climate risk for five years because it gives us a good idea of how they plan for risk generally," Dr Woods told BusinessDaily.

Scott Marshall, head of industrial research at Shaw Stockbroking, confirmed that "clean" initiatives were not being factored into valuations by most analysts.

"Being green may be good for the environment, but the only way it is going to be good for the share price is if companies can show it saves money," Mr Marshall said.

"Until we know more about emissions trading, there's no value assigned to stocks for being green.

"It is just too hard to value at the moment."

Mr Shaw said there was "a lot of paperwork estimating the cost of emissions going around between stock brokers and a lot of office commentary on carbon trading", but at this stage this information was not being used to assess risk profile, despite client concerns.

A number of brokers have admitted that big clients and institutions are leaning on advisers for more clarity on how portfolios are likely to be affected when carbon trading starts.

BusinessDaily is aware that numerous organisations have already conducted extensive modelling under different scenarios to assess the impact of carbon trading on different sectors and even individual companies.

But for a number of reasons, the view is that it is premature to reveal this information until the government releases more details on how emissions trading will work.

One organisation that refused to be named said it had already done thorough economic modelling but had been pressured by a government department to not release its findings.

"We used a grant to do the research and now that we have finished, some people are dragging their feet about making it public," the unnamed source said.

But the lid is likely to lift in coming weeks as a number of reports are released in answer to rising demands from institutions for information.

The Climate Institute, which published a climate change report on the electricity sector last month, is expected to produce more detailed analysis at the end of this month on how other sectors are likely to be affected by carbon pricing.

Also at the end of June, institutional investors will begin to have a better idea of how much carbon most of Australia's top 100 companies are emitting thanks to a voluntary reporting exercise.

The investors hope to be able to assess and compare strategies the companies are using to protect shareholder returns from global warming liabilities.

The information will be collated by the London-based Carbon Disclosure Project into a global report and publicly released in September.

Among the project's Australian signatories are AMP Capital Investors, ANZ Bank, BT Financial Group, National Australia Bank, Hastings Funds Management, Portfolio Partners and a number of the biggest superannuation funds.

Last year, just 10 per cent of companies surveyed provided sufficient information for the institutions to gain an insight into how they will manage environmental liabilities.

This year, the response rate from top 100 companies is greater.

The Australian end of the disclosure project is being organised by Goldman Sachs JB Were and the Investor Group on Climate Change.

Mr Gray said responses reveal which companies are fully integrating global warming issues into their planning and are likely to be "better able to turn the climate change issue into a source of competitive advantage and therefore shareholder value".

In a report on the project last year, Mr Gray named 20 Top-100 companies that produced the strongest inclination to embrace environmental risks.

Mainstream investors want to, and need to, consider how exposed they are to climate change liabilities, Mr Gray wrote.