Energy companies, food suppliers, and numerous other industries expend substantial sums of money each year attempting to ascertain how climate change might affect their financial stability and profitability. Many insurance companies, for example, now utilize forward-looking catastrophic risk models to assess areas of vulnerability and estimate potential liabilities resulting from individual extreme weather events and long-term environmental change. The information yielded helps to shape an insurer’s decision regarding whether or not, and to what extent, it will provide coverage for a particular region. All of this data can provide a clear picture of corporations that are preparing to adapt in the face of climate change and those that are not. Consequently, there is an opportunity to develop carefully tailored disclosure requirements that protect sensitive data but provide enough information for investors to make informed decisions about where to put their money while simultaneously encouraging businesses to address climate change using the best resources available.

Although the accuracy of data regarding the effects of climate change continues to improve, we have not reached the point of being able to predict exactly when and where a cataclysmic event will occur. Nor can we fully assess the financial implications of climate change with complete accuracy. Nevertheless, this uncertainty should not preclude the government and private sector from taking a responsible approach to mitigating the potential effects of climate change. The devotion of substantial financial resources to fund internal research analyzing how climate change affects a company’s operations is clear evidence that many businesses and industries are particularly concerned about the magnitude of its consequences. Investors, who are also devoting significant financial resources to the company, should also be privy to such material information in order to make an adequately informed decision where to invest.

If a company is not analyzing future impacts of climate change and taking proper steps to mitigate potential loss, an investor may think twice before investing or choose to invest elsewhere. Similarly, consumers who do not want to conduct business with companies that are not environmentally responsible should have the opportunity to make an informed choice as well. By requiring transparency, those companies that have failed to adjust their behavior to reflect climate change will also have a greater incentive to develop a more responsible approach that minimizes risk while encouraging investment.

Certainly, companies should not be required to reveal trade secrets, proprietary information, or other sensitive data. Insurers should not be required to provide the public—and in turn, competitors—with the data provided by catastrophic risk models. To do so would undoubtedly generate a free rider problem, inhibit competition, and discourage companies from investing in this type of technological research. However, requiring a company to state whether it uses such risk models or provide general information about how the business is adapting to climate change tells investors and the public that the company is addressing climate change concerns and working to manage risk. Not only will this disclosure be an excellent marketing tool for environmentally responsible businesses, but it will also encourage them to continue to analyze and proactively adapt to the effects of climate change on their operations.

Environmental groups, investors, and consumer groups have been at the forefront of increased efforts to require public disclosure regarding the role climate change is playing in company operations. During the 2008 proxy season, a record number of climate-related shareholder resolutions were filed, most of them demanding information about how publicly traded companies are affected by climate change and how they are responding. Nearly half of the proposals were later withdrawn after the companies agreed to devote increased attention toward addressing climate change issues. Meanwhile, the National Association of Insurance Commissioners, an organization composed of state insurance regulators whose duty is to protect the interests of insurance consumers, recently approved the creation of a Climate Risk Disclosure Survey designed to increase the information provided by insurers associated with financial risks of climate change. If adopted by the states as expected, the eight-question survey will require insurers with annual premiums exceeding $500 million to annually disclose information such as anticipated climate change-related risks, mitigation plans, whether the company utilizes computer modeling, and the impacts of climate change on the company’s investment portfolio. The survey is the first industry-wide climate risk disclosure requirement of its kind and has the potential to be used as a model for federal disclosure regulations.

State and local governments have begun to act as well. In 2007, New York Attorney General Andrew Cuomo subpoenaed five energy companies in the state, seeking to determine whether investors were adequately informed of potential liabilities resulting from increased carbon emissions associated with the building of five coal-fired power plants. In an agreement with Cuomo in August of 2008, Xcel Energy became the first energy company to enter into an enforceable agreement to publicly disclose financial liabilities resulting from climate change. More states are expected to follow New York’s lead and expand their inquiries into other industries as well.

Even though prior legislative efforts at mandatory disclosure have been unsuccessful at the federal level, the current environment appears ripe for the issue to be readdressed. The recent White House report re-emphasizes the seriousness of climate change; Congress and the SEC are under pressure to increase their regulatory oversight; and the public is demanding greater corporate responsibility. Proper disclosure can inform investors, boost the image of responsible corporations, and incentivize action for companies that have not properly addressed climate change.

Kevin Weigand is a third-year student at William and Mary School of Law and the Managing Editor of the Environmental Law and Policy Review. This column draws on his article, “Climate Change Disclosure: Ensuring the Viability of the Insurance Industry While Protecting the Investor,” which will be published in Volume 34 of ELPR in early 2010.