Breakthrough: Investors to Find Out True Financial Risks of Coal
by David Sassoon - Aug 28th, 2008
New York Attorney General Andrew Cuomo wondered whether investors in coal-burning utilities were being sufficiently well-informed about the risks of where they were parking their money. So he subpoenaed five companies for information -- Xcel Energy, the AES Corporation, Dominion, Dynegy and Peabody Energy.
Were they disclosing the full roster of financial risks -- like the cost of possible future lawsuits or higher operating costs from new regulations that put a price on carbon?
Now a year later, Cuomo has reached a disclosure deal with a first company. Xcel Energy has agreed to give its investors detailed warnings about the risks that global warming poses to its business.
Cuomo, who used the Martin Act to press his case with the companies, explained the importance of the deal in a statement:
This landmark agreement sets a new industrywide precedent that will force companies to disclose the true financial risks that climate change poses to their investors. Coal-fired power plants can significantly contribute to global warming, and investors have the right to know all the associated risks.
The attorney general is still negotiating with the four other companies. Peabody Energy might be the toughest nut to crack. When Cuomo first made his inquiry a year ago, the company called the request "outrageous" and a form of "legal harassment," according to the New York Times.
Now that Xcel is setting the industry standard on carbon disclosure, it puts the pressure on peers to follow suit. On Wall Street, information is the gold coin behind investment decisions. This deal with Cuomo, who from his perch can oversee companies that sell their securities on Wall Street, is sure to send a loud signal not only through the utility sector, but the entire investment community.
The deal is legally binding, and so represents a breakthrough many years in the making. Thanks to shareholder activism and the Carbon Disclosure Project, companies have been providing more carbon risk information, but it has been on a voluntary basis.
This deal changes the game. It requires Xcel to analyze the effects of potential carbon regulations on its business in the states and countries where it operates, and to disclose that information in its filings with the Securities and Exchange Commission.
That is something Ceres and a broad coalition of investor and environmental groups have been pressing for -- full corporate climate risk exposure. It would change the fundamental vocabulary of financial risk, and by forcing measurement of carbon, take the first step in its universal management.
This is a legal breakthrough that could bring down many walls. Stay tuned.
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CYA will require everyone to copy Xcel, then it gets interesting
If Xcel notes in their SEC filings that GW could lead to constraints or costs on burning coal and maybe even cause the cost of building new coal plants to be stranded, I think every other power company will have to do likewise. I can imagine a CEO being cross examined for a shareholder lawsuit: Xcel said it was a risk. They were right, yes? Now, Mr. CEO, were you lying when you said there was no risk? Or were you simply too stupid to realize it, even after Xcel pointed it out?
The next shoe to fall concerns state Public Utility Commissions. When reviewing plans for new coal plants, will they say, "since you told the SEC that the cost of a new coal plant conceivably could be stranded, should the $billions of risk be taken by your shareholders or the ratepayers in our state?. Should your shareholders have the opportunity to make all the profits without taking any of the risk? Should our ratepayers take all the risk of paying off the potential white elephant, perhaps doubling the price of power for a generation?".
My bet is that if the PUCs say the shareholders have to take a big part of the risk, that there won't be any more new coal plants.
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