Former SEC Commissioner: Steyer Group ‘Inviting Securities Fraud’

Effort to get SEC involved in climate fight fraught with legal pitfalls

Tom Steyer / AP
July 17, 2014

The latest effort to get federal regulators involved in the fight over global warming could put major American companies at risk of being charged with fraud, according to a former Securities and Exchange Commissioner.

Former Treasury Secretaries Robert Rubin and Hank Paulson, who served under Presidents Clinton and George W. Bush, respectively, are spearheading the effort in conjunction with a newly released report warning of the financial risks of rising carbon emissions.

Rubin and Paulson want the Securities and Exchange Commission (SEC) to force public companies to factor the potential effects of climate change into their projected liabilities, and to disclose that information to shareholders.

Paul Atkins, an SEC commissioner from 2002 to 2008, insists the effort "is tantamount to inviting people to engage in securities fraud."

Calls to get the SEC more involved in the climate debate are an extension of long-running efforts by environmentalists to use "shareholder activism" to force public companies to reduce their carbon footprints, Atkins said.

Those efforts have been going on for years, he noted, but their latest iteration would force companies to make highly speculative projections about the specific impacts of carbon emissions on their bottom lines. If those projections don’t pan out, the companies would be at risk of expensive litigation and potential criminal charges.

Paulson and Rubin want the SEC to force companies to factor climate-related liabilities into their mandatory disclosures of projected financial liabilities.

"If businesses had to disclose that, then that would become an incentive for business to act," Rubin said at an event last month previewing a report called Risky Business, which aims to make the microeconomic case for addressing climate change.

Carbon emissions will affect business’ bottom lines as resulting changes in weather and climate affect entire American regions and industries, the report argues.

A group run by billionaire environmentalist Tom Steyer, one of the Democratic Party’s most prominent financiers and a supporter of punitive restrictions on carbon emissions, helped produce the report. Former New York City mayor Michael Bloomberg was also involved in the project.

Paulson echoed Rubin at its June rollout. "Perhaps the SEC should be requiring disclosures," he said.

Public companies’ obligations to disclose "loss contingencies" are generally governed by the Financial Accounting Standards Board (FASB), a private nonprofit that develops guidelines for the disclosure of financial information.

In its Statement of Financial Accounting Standards No. 5, commonly known as FAS 5, FASB notes that companies may choose to draw from current income to mitigate contingency losses if "information available prior to issuance of the financial statements indicates that it is probable that an asset had been impaired or a liability had been incurred at the date of the financial statements" and if "the amount of loss can be reasonably estimated."

Disclosing that information "may be necessary for the financial statements not to be misleading," FAS 5 notes.

Atkins, who is now the CEO of Patomak Global Partners, insists that estimates about the likely financial losses associated with global warming are not specific enough to satisfy those conditions.

Rubin, Paulson, Steyer, Bloomberg, and the rest of the Risky Business team are "inviting securities fraud and further litigation, because if these companies make some sort of speculative types of projections that don’t turn out to be true, then that’s how companies get sued," Atkins said.

The Risky Business report estimates the impact of global warming on a number of industries, but Atkins said that it cannot possibly estimate those impacts on specific companies in enough detail to merit SEC disclosure or measures designed to mitigate potential future impacts of climate change.

In a June conference call with some of the financial and environmental experts behind the Risky Business report, lead coauthor and top Steyer staffer Matt Lewis noted the hypothetical nature of much of the financial damage projected in the report.

By the time most businesses feel the effects of global warming, he said, it will be too late to reverse the trend. "Action needs to happen today, before the extreme becomes the norm, before most businesses recognize the actual impacts," he told business executives on the call.

"That just doesn’t make any sense," said James Copland, director of the Manhattan Institute's Center for Legal Policy and publisher of Proxy Monitor, a website that tracks shareholder activism.

"Assuming there is man made climate change, and assuming the [U.N. Intergovernmental Panel on Climate Change] projects are accurate, … you’re talking about changes that are so far out on the time horizon that they’ll be effectively discounted to zero," Copland said in an interview.

That makes disclosure troublesome from a company’s perspective. But Atkins noted that it also poses problems for individual investors.

"If you go back, and you look at the list of companies that were in the DOW 30 or the S&P 100 even in 1930 or 1940, … most of those companies are out of business, or they’ve changed," he noted.

"Why should current shareholders take steps to [mitigate climate-related liabilities] if their company’s not even going to be around" when that damage is realized?

Those are not just individual investors, he noted. "We’re talking about firemen and policemen and teachers, who are investing through their big retirement plans, and people who have 401K plans," Atkins said. "So this is not just the fat cat Wall Street guy that people like to denigrate. It’s real people who will suffer."