Environmental liabilities and the federal securities laws: a proposal for improved disclosure of climate change-related risks.

• Author: Latham, Mark

1. INTRODUCTION II. ENVIRONMENTAL LIABILITIES AND DISCLOSURE A. An Overview B. Climate Change Risks and Liabilities 1. The Regulatory Risks of Climate Change 2. The Direct Physical Risks to Businesses 3. Litigation Risks a. Damages for the Harms Caused by Climate Change b. Inability to Construct New or Modified Emission Sources III. THE IMPETUS FOR THE FEDERAL REGULATION OF SECURITIES: THE CRASH OF 1929 A. Disclosure: The Essence of the Federal Securities Regulatory Regime B. Regulation S-K and Disclosure Under the 1933 and 1934 Acts C. Regulation S-X and the Disclosure of Financial Information IV. THE OBLIGATION TO DISCLOSE ENVIRONMENTAL LIABILITIES UNDER THE 1933 AND 1934 ACTS A. Development of the SEC s Environmental Disclosure Requirements 1. Further Impetus for Disclosure of Environmental Liabilities: The National Environmental Policy Act 2. Natural Resources Defense Council v. SEC 3. Regulation S-K and the Disclosure of Environmental Liabilities B. Accounting and the Disclosure of Environmental Liabilities 1. FASB Statement No. 5 2. Staff Accounting Bulletin No. 92 3. SOP 96-1 4. SFAS No. 143 5. FIN 47 C. EPA's Foray into Environmental Disclosure Obligations V. LIABILITY FOR INADEQUATE OR MISLEADING ENVIRONMENTAL DISCLOSURES VI. THE INTERPLAY BETWEEN THE CURRENT DISCLOSURE REGIME AND CLIMATE CHANGE RISK A. Disclosure of Regulatory Risks B. Disclosure of Climate Change Litigation Risks C. The Physical Risks of Climate Change VII. A PRESCRIPTION FOR IMPROVED CLIMATE CHANGE LIABILITY DISCLOSURE A. The SEC Should Act. B. A New Role for the Emergency Planning and Community Right-to-Know Act in Improving Disclosure of Climate Change Risk 1. Overview of EPCRA 2. Addition of Carbon Dioxide to the List of Chemicals Subject to Section 313 3. The Benefits Reaped by Imposing Section 313 Obligations on C[O.sub.2] I. INTRODUCTION

   As society strives to maintain and to improve our environment, costs are imposed that may need to be disclosed to investors under our federal securities laws. These environmental costs have reached staggering proportions in recent years and are one of the critical issues facing businesses today.... While the aggregate numbers concerning potential environmental costs are staggering, what is even more frightening is the massive amount of acknowledged environmental cost that has yet to be reflected in corporate financial statements. (1) It is beyond doubt that businesses in the United States collectively incur billions of dollars in costs annually to comply with a myriad of local, state, federal, and international environmental ordinances, regulations, statutes, and treaties. (2) As the quotation above from a former commissioner of the Securities and Exchange Commission (SEC or Commission) recognizes, however, the extent to which publicly traded companies are providing investors with sufficient information about the costs and liabilities associated with the environmental regulatory regime remains the subject of debate. This debate is occurring at a time when the pressures upon businesses to disclose additional information, particularly information about the costs associated with the risks presented by climate change, are mounting. (3) This Article traces the evolution of the obligation of publicly traded companies to disclose environmental liabilities under the federal securities laws, discusses the climate change risks confronting businesses, and concludes with a proposal to better inform the public, investors, businesses, and regulators of the potential liabilities this evolving environmental threat presents.

   The risks and costs associated with climate change are real today for numerous businesses, ranging from those in carbon intensive industries such as refining to those that directly emit little, if any, greenhouse gases such as property casualty insurers. Calls for political and public action are increasing, not just in the United States but globally, to take decisive action to reduce the emissions of carbon dioxide and other greenhouse gases through regulatory mechanisms such as trading programs modeled after the sulfur dioxide trading program in the Clean Air Act (CAA), (4) or a tax specifically targeting carbon emissions. (5) Consequently, businesses face a new wave of difficult to ascertain and ill-defined environmental costs resulting from the ever louder chorus calling for legislative and regulatory action responsive to the growing evidence that human activity is having a potentially catastrophic effect on our climate. (6) How-should the multitude of businesses that many believe are already impacted financially by climate change, even in the absence of federal legislative action, inform investors of the exposure that they face? (7) That is, what should these businesses disclose to investors under the federal securities laws regarding climate change risks?

   This Article ultimately focuses on that very question. Part II provides an overview of the climate change risks that confront businesses today. Part III reviews how disclosure of liabilities and risk generally became an integral part of federal securities regulation, and Part IV explores the evolution of the SEC's efforts, along with the accounting profession's guidance, to regulate the disclosure of environmental liabilities. The focus of Part V is a summary of the statutory liability that publicly traded companies may face as a result of inaccurate or misleading disclosures concerning environmental liabilities. In Part VI, the Article evaluates how, under the current disclosure regime, risks specific to climate change are lacking in the typical disclosure submitted to the SEC. In Part VII, the Article offers a proposal that, with minimal additional regulation, should serve to increase the information flow concerning the climate change liabilities that publicly traded companies may encounter.

   The proposal offered here to improve disclosure consists of two components. The first component consists of new guidance or regulations by the SEC that would provide much needed clarity regarding the obligation of publicly traded companies to disclose climate change risk. This aspect of my proposal requires disclosure of the material costs associated with the need to comply with federal, regional, state, and local regulations mandating a decrease in carbon dioxide, the most abundant greenhouse gas. In addition, under the SEC regulatory aspect of my proposal, any climate change litigation pending against a publicly traded company also triggers a disclosure obligation. The second component of my proposal asserts a new role for section 313 of the Emergency Planning and Community Right-to-Know Act (EPCRA). (8) Section 313 essentially requires that a variety of industrial facilities report annually the use, manufacture, or processing of specified "toxic chemicals" if certain threshold amounts are met. (9) This part of my proposal requires the United States Environmental Protection Agency (EPA) to add carbon dioxide to the list of reportable EPCRA section 313 toxic chemicals. Through this new role for EPCRA, on an annual basis facilities that are large emitters of carbon dioxide will have to include such emissions as part of the information submitted to the publicly available Toxics Release Inventory database.

   The proposal suggested here not only would provide investors with information about potential climate change liabilities, but also will provide information about the emissions of the main greenhouse gas, carbon dioxide, by publicly traded companies so that investors can weigh and compare across industries the level of emissions as part of the information mix used in reaching an investment decision. This new requirement to account for and disclose carbon dioxide emissions would also provide businesses with information that could drive voluntary efforts towards carbon dioxide emission reductions, thereby reducing public pressure on the companies. Additionally, the proposal would provide a verification mechanism for emission reductions claimed by businesses or mandated by regulation. Lastly, in order to effectively address greenhouse gas emissions through any new sweeping federal regulatory regime, which appears inevitable, an accounting of the emissions of heat trapping gases is a necessary step. Consequently, the compiling and disclosure of carbon dioxide emissions through EPCRA section 313 from a wide array of industrial sources will assist regulators in developing an effective regulatory mechanism, which could result in an effort to address climate change and in meaningful reductions in carbon dioxide and other greenhouse gases.

2. ENVIRONMENTAL LIABILITIES AND DISCLOSURE

   1. An Overview

   To place climate change-related liabilities in the context of disclosure under the federal securities laws, it is helpful to have a general understanding of the types of environmental liabilities confronting businesses and the complexity that can arise in their disclosure. Speaking broadly, the liabilities imposed by environmental laws upon businesses generally fall within one of three categories. The first category, and for many businesses most likely the largest portion of environmental costs, arises out of the legal obligation to achieve and maintain compliance with environmental laws and their implementing regulations. (10) Examples of such compliance costs include the expenditures needed to properly store, dispose, treat, or recycle hazardous wastes so that they do not pose a threat to human health or the environment. (11) Another example of compliance costs is the capital necessary to design, construct, and install pollution control equipment, such as a wastewater treatment system required by the Clean Water Act (CWA) (12) to reduce pollutants prior to discharge or the installation and operation of sophisticated state-of-the-art technology to meet emission limits pursuant to the CAA. (13) Within the category of compliance-related...