All posts tagged 'Carbon Disclosure Project'

A Slow-Burning Fuse: Climate Change from the Risk Management Trenches

April 29, 2014 20:02
by J. Wylie Donald
This morning was the only professional session on climate change at the 2014 annual conference of RIMS, the Risk and Insurance Management Society, the preeminent risk management trade group in the country. Over 9,000 individuals from insurers, policyholders, brokers and vendors are in attendance.  In a different conference room, my partner made a presentation on "additional insured" coverage with 400+ in attendance.  About 30 showed up for climate change. The disinterest was not due to the quality of the presenters.  Climate Change: How to Stress Test Your Organization was presented by  Jeffrey Bray, Senior Vice President, Global Risk Management of Prologis, Inc. and John Marren, Director, Global Risk and Insurance Management of CSL Behring and also Business Insurance's Risk Manager of the Year.  Both are engaged in climate change risk management; they were here to give a view from the trenches on practical ways to address climate change issues. Both companies were new to me. CSL Behring is the American subsidiary of CSL Australia, whose core business is the manufacture of vaccines and plasma protein biotherapies with $5 billion in revenue.  Prologis is a global operator of industrial real estate with 3000 facilities and 569 million sq. ft. under management.  CSL Australia, in addressing a need for transparency in line with its corporate social responsibility goals, concluded that it needed to include climate change in its risk assessments.  Assessing climate change risk was also required in order to accurately respond to inquiries by the Carbon Disclosure Project, which sought information on the effect of climate change on business. CSL already had a risk framework in place.  They wanted to treat climate change just like every other risk.  If it was material it needed to be addressed.  If not, it still needed to be on the radar so they could do more than just react if and when it surfaced.  Fortunately, senior management was intimately involved with corporate social responsibility and including climate change in that area was not difficult.  The methodology of bringing climate change into the risk management framework was relatively simple.  First, the context needed to be established.  Environmental, social and economic impacts would be considered on a 25-year time horizon.  Second, information needed to be gathered as to where CSL's concerns would arise.  Workshops were held with every business unit.  Research was conducted.  Third, the data needed to be analyzed.  Last the findings needed to be reported.  The result was the identification of six key vulnerabilities:1.  Would there be enough potable water and where would it come from?2.  Would their sole source suppliers comply with environmental requirements?3.  Could time-sensitive biological raw materials be delivered timely?4.  Would energy supply reliability decrease?5.  Would resulting new diseases impair the availability of plasma donors?6.  Would resulting new diseases provide an opportunity for new vaccines? CSL utilized their corporate risk framework to guide the assessment of risks for the risk management process.  Climate change risks were integrated with all of the corporation's other risks for a relative comparison.  None of the six risks were considered material; nevertheless, they are being evaluated every two years on a Zero Basis risk review for their business unit. Prologis concedes it is not as far along in the evaluation process as CSL.  It noted that there are significant impediments to making that evaluation.  The accuracy of the data is varied and data is not available for many circumstances.  The modelers provide estimates with significant long-term variation.  Accounting for various exposures (inland flooding, storm surge, temperature change, storm severity) is variable.  For example, flood protection in Amsterdam is much better that it is in New York.  Despite these data and analyses challenges, Prologis recognized that climate change will affect it.  Ten of its markets (ports) ranked in the OECD top 15 for climate change  vulnerability.  Those potential impacts included  increased physical damage and business interruption, which would lead to more restrictive and costly insurance coverage.  Recognition that property concentrations in vulnerable areas would exacerbate event impacts, has led to risk mitigation in the form of more stringent construction requirements, new site selection criteria, and enhanced disaster management. A key question was raised during the presentation by the moderator, Andrew Thompson, the Global Lead, Risk and Insurance Practice, for the engineering firm, Arup.  How does one integrate a slow-burning risk like climate change into risk planning, which typically has much shorter time horizons.  Mr. Marren of CSL acknowledged that CSL's typical risk horizon is 12-24 months. The answer, at least for these two billion dollar companies, was in a nutshell:  strategic long-range thinking.  They concluded the presentation with four key points:1.  Companies should focus on increasing resilience;2.  Climate change risk is manageable;3.  While ongoing analysis is recommended, there need be no direct change in current business activity; and 4.  It is important to be proactive to reduce costly future solutions. This is not profound.  What is profound, is that at least two substantial business entities are stepping around the rhetoric and addressing climate change as simply another business risk (like interest rates, or workforce training, or raw material sourcing) that must be addressed in the short-term and in the long-term.  That short-term results have not yet been identified, does not say anything about the need for long-term consideration, integration and planning.  Others seeking long-term business success should follow.

Climate Change | Climate Change Effects

CDP 2010 Is Upon Us

March 5, 2010 17:02
by J. Wylie Donald
We talked in January about the SEC's disclosure guidance and noted the relevance of the Carbon Disclosure Project. It's almost as if I have a hotline to 40 Bowling Green Lane in London, where the CDP offices are. I receved earlier this week their announcement of the 2010 questionnaire. It has been sent to 4,500 companies globally. The number of institutional investors behind the mailing is over 500 "with a combined US$64 trillion of assets under management." The email has this to say about the SEC guidance: "CDP welcomes the recent climate change risk disclosure guidance by the Securities and Exchange Commission (SEC); an important step in helping US companies better report material climate change impacts to their investors." Following one of the links in the email, I proceeded to the CDP webpage, where I learned more. The CDP recognizes one of the critical weaknesses of climate change data in a global marketplace: "There is currently no global carbon disclosure framework and ... to minimize the financial and reporting burden for companies, guidance on disclosure of climate change information must be as harmonized as possible." To achieve that end, CDP manages the activities of the Carbon Disclosure Project(CDSB). The CDSB has prepared a draft Reporting Framework www.cdsb-global.org/uploads/pdf/CDSB_Reporting_Framework.pdf to further the dialogue of disclosure. In the CDSB's words: "the Reporting Framework provides a workable filter for companies to identify, and for investors to see, the major trends and significant events related to climate change that affect a company’s current or future financial condition."

Carbon Dioxide | Climate Change

Disclosure Pressure Ratchets Upward - Will D&O Policies Provide Cover?

February 16, 2010 02:42
by J. Wylie Donald
I concluded that I needed to pay more attention to climate change issues when I attended a seminar in 2005 and one of the speakers commented that inadequate climate change disclosures would not be covered under a D&O policy because of the pollution exclusion. Could it be so? The argument was deceptively simple. Carbon dioxide was a "pollutant." The inadequate disclosure "arose" out of the "release" of carbon dioxide. There is no coverage for same. Q.E.D. Thoughtful analysis, however, dispatches this canard. As we have written previously, carbon dioxide should not be classified as a pollutant. It does not irritate or contaminate: it is biologically benign except at impossibly high concentrations, and it is found in the atmosphere in billions of tons, a natural and essential constituent. And because it does not make the atmosphere impure, it is not a pollutant. But one does not even have to reach that conclusion. Any liability alleged against a director or officer for inadequate disclosure of risks from rising CO2 levels, arises from the inadequate disclosure not from the release of carbon dioxide. Cf. Owens Corning v. National Union Fire Insurance Co., No. 97-3367, 1998 WL 774109 (6th Cir. Oct. 13, 1998) (alleged inadequate disclosure of asbestos risk); Boliden Ltd. v. Liberty Mutual Insurance Co., Dkt. No. 05-CV-284493PD1, 2007 CanLII 11309 (Ont. Super. Ct. Apr. 3, 2007) (ore processing risks); Sealed Air v. Royal Indem. Co., 961 A.2d 1195, 404 N.J. Super. 363 (App. Div. 2008) (asbestos risk). But see National Union Fire Insurance Co. v. U.S. Liquids, Inc., 88 Fed. Appx. 725 (5th Cir. 2004) (per curiam) (pollution exclusion applies to allegations of improper disclosure of illegal toxic waste disposal). The requirements for disclosure are ratcheting upward. It started with activist shareholders requesting climate change disclosure at their companies' annual meetings. Next came the Carbon Disclosure Project, which over time has enlisted over 2000 companies in their annual reporting. See cdproject.net. In 2007, New York Attorney General Cuomo served subpoenas on certain publicly traded electric utilities and a coal company (based far from New York), seeking information on their climate change disclosures. New York has settled with three of the five companies, Xcel Energy, Dynegy and most recently with AES Corp. Dominion Resources and Peabody Energy remain in the dispute. The National Association of Insurance Commissioners weighed in with their disclosure requirements for insurance companies in 2009 (effective 2010). And now, with the publication of the SEC's recent interpretive guidance on climate change disclosures, it is only a matter of time before some investor's prescience is not rewarded and he or she or it concludes that the fault lies not in the stars, but in a corporate prospectus.   Should that come to pass, we anticipate the corporation will tender the claim to its D&O insurer for a defense. Undoubtedly the insurer will consider asserting the application of the policy's pollution exclusion. The ultimate result will depend on all the facts. One fact will be the extent and timing of disclosures. Another, however, could be that the policyholder had the pollution exclusion endorsed out its policy. That is a step the risk manager could be taking right now, regardless of what the corporate lawyers ultimately conclude about disclosure.

Carbon Dioxide | Climate Change | Insurance | Greenhouse Gases

Climate Change Disclosure at the SEC - A Move for Consistency

January 31, 2010 16:00
by J. Wylie Donald
It has been our view for a number of years that climate change disclosures are not for every publicly traded company. What is for each of those companies, however, is the need to take a close look at the risks and opportunities posed by climate change and to assess their importance for the company's specific circumstances. The Securities & Exchange Commission has now reached a similar conclusion. In a press release this past Wednesday, the SEC announced its decision (3-2 on partisan lines) to provide interpretive guidance on existing SEC disclosure requirements applicable to legal and business developments relating to climate change. As stated in the press release, http://www.sec.gov/news/press/2010/2010-15.htm, the Commission's interpretive releases "are intended to provide clarity and enhance consistency for public companies and their investors." As further stated by Commissioner Schapiro, the application of this guidance to climate change is not an opinion on "whether the world's climate is changing, at what pace it might be changing, or due to what causes." The SEC expressly was not "weighing in" on those topics. Nonetheless, some who are familiar with the SEC's inner workings were surprised and acknowledged that it is a big deal for the SEC to take such a step in confirming its interpretation of the applicable disclosure regulations as they relate to global warming risks. Environmentalists and leading state pension fund investors have long argued that the SEC should issue such guidance and formally requested such action in a peition filed with the SEC in 2007. The guidance identifies various areas where disclosure might be required: 1. Legislation and regulation that may impact a business. (e.g., the effect a carbon tax may have on revenue) 2. International agreements that may impact a business. (e.g., the lapse of the Kyoto Protocol may change the need for carbon credits) 3. Regulation and business trends that may have indirect consquences on a business (e.g., refrigerator manufacturers may need to assess energy efficiency as a business trend) 4. Physical impacts of climate change. (e.g., a shipping company may need to evaluate the effect of a melting icecap and the opening of the Northwest Passage) After reading this list, some will certainly conclude that the guidance offers nothing new. Each of these subjects falls within one of the disclosure requirements already on the books for many years. For example, Item 303 of Regulation S-K requires the disclosure in management's discussion and analysis of circumstances materially affecting one's business. If rising sea levels can be determined to pose a material risk to casino operators on the Atlantic seaboard, then disclosure is required. In similar fashion, brethren in Nevada may need to discuss the impact of perpetual drought in the American southwest. Whether these outcomes are the result of climate change is not relevant to the disclosure obligation. Whether they are material is. Likewise, Item 101 would capture disclosure of legislation and regulation material to one's operations. If a carbon tax or cap-and-trade program has a material impact on one's bottom line, one does not need the new guidance to make disclosure. On the other hand corporate disclosures to date are uneven. The Carbon Disclosure Project, http://www.cdproject.net, has been soliciting disclosure from the world's publicly-traded companies for several years. A review of those reports is striking in the variation of both the scope and detail of the disclosures. As a result of the guidance, however, one can now expect disclosing institutions to be reviewing the disclosures of their peers, in order to assess more precisely what needs to be said. The SEC's decision was not the first regulatory pronouncement on climate change disclosure. Last year the National Association of Insurance Commissioners promulgated rules for their regulated community (insurance companies). We do not expect the SEC's guidance to be the last word either. Regulated entities will do well to pay close attention.

Carbon Emissions | Climate Change | Legislation

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