New York Attorney General Reaches Settlement with Peabody Energy Corporation to Change its Disclosure Practices Regarding Climate Change
On November 8, 2015, the New York Attorney General entered into a settlement agreement with Peabody Energy Corporation (“Peabody” or the “Company”), the world’s largest publicly traded coal company, regarding the Company’s practices with respect to disclosure concerning climate change and the potential impact of climate change on its business.1 The settlement concludes a two-year investigation by the Attorney General’s office, under New York’s Martin Act, which determined that Peabody’s SEC filings and other public disclosures made misleading statements about the potential effects of proposed laws and regulations targeting carbon emissions on Peabody’s future business. Under the terms of the settlement, Peabody neither admitted nor denied the investigation’s findings, but agreed to make certain corrective disclosures in its next quarterly report and to make certain adjustments to its disclosure practices going forward.
In 2013, the New York Attorney General’s office (the “NY AG”) began an investigation under Article 23-A, Section 352 et seq. of the New York General Business Law (the “Martin Act”) and Section 63(12) of the New York Executive Law regarding public disclosures made by Peabody about the potential impact of new climate change laws, regulations and policies on its financial condition. The investigation’s conclusions, together with the terms of the settlement agreement with the Company, are set forth in an Assurance of Discontinuance issued by the NY AG. The NY AG found that the Company had violated the Martin Act by making the following misleading public statements regarding climate change:
- Public Statements Inconsistent with Internal Projections: The Company’s annual reports filed with the SEC in recent years stated that the “[e]nactment of laws or passage of regulations regarding emissions from the combustion of coal by the U.S. or some of its states or by other countries, or other actions to limit such emissions, could result in electricity generators switching from coal to other fuel sources,” but also included a statement that it was “not possible for [the Company] to reasonably predict the impact” of any such laws or regulations on its results of operations, financial condition or cash flows. The NY AG found that the Company’s statement that it could not “reasonably predict” the impact of future regulatory actions was misleading because the Company had on multiple occasions prepared internal financial projections which quantified the potential impact of certain proposed climate change regulatory actions, and had determined that certain such actions could have a severe negative impact on the demand for coal and the Company’s future financial condition.
- Discussion of Third-Party Projections: In several of its SEC filings and in earnings calls with investors, the Company discussed projections for future coal demand made by the International Energy Agency (the “IEA”), a leading authority on future global energy developments. The IEA issues projections based on several alternative scenarios, based on varying assumptions about future world energy development and potential governmental action affecting the energy sector. The NY AG found that the Company’s discussions of the IEA projections were misleading because the Company only discussed projections that were premised on the most favorable scenario (which was based on an assumption that governments will not implement any recent environmental commitments that have yet to be codified in legislation and will not introduce any other new policies bearing on climate change pollution in the future, even those that are in fact likely to be implemented). The Company did not mention the less favorable projections under the other scenarios, including the so-called “new policies” scenario, which takes into account policies and measures affecting energy markets which have been adopted, but not yet fully implemented, and is considered by the IEA to be its “central scenario.”
While the Company neither admitted nor denied the investigation’s findings, it agreed to revise its disclosure practices in the future. In particular, the Company agreed:
- to include specific disclosures in its next quarterly report, including a statement in the risk factors that “[c]oncerns about the environmental impacts of coal combustion, including perceived impacts on global climate issues, are resulting in increased regulation of coal combustion in many jurisdictions . . . which could significantly affect demand for our products or our securities”;
- not to make any representation that it cannot reasonably project or predict the range of impacts of future laws, regulations and policies relating to climate change or coal on the Company’s markets, operations, financial condition or cash flow;
- if it makes any statement as to the difficulty of making such projections or predictions, to also state that the Company has made projections involving certain potential laws and regulations relating to climate change or coal, which could result in materially adverse effects on the Company’s markets, operations, financial condition or cash flow; and
- in any disclosure of IEA statistics or projections, to include an explanation of the IEA’s other less favorable scenarios and provide the corresponding statistics or projections under each such scenario.
The settlement is the most recent development in a trend towards increased regulatory scrutiny of climate change disclosure by public companies. Reporting companies, particularly those in fossil fuel industries, may wish to review their disclosure practices regarding the possible financial impact of climate change and of proposed laws, regulations and policies aimed at reducing carbon emissions. In particular, companies may wish to consider whether their disclosure takes appropriate account of internal analyses or projections, as well as analyses or projections prepared by consultants, that may have been prepared regarding the potential financial impact of these matters. Although the settlement is unusual for its detailed focus on a single company’s public disclosure, the Martin Act gives the NY AG extremely broad subpoena authority to investigate publicly traded companies for misleading disclosure practices. The NY AG’s office recently confirmed that it is investigating claims that ExxonMobil suppressed climate change research and misled its investors about the potential financial impact of climate change, and has issued a subpoena demanding extensive financial records, emails and other documents. Published reports suggest that the Exxon investigation may be expanded to encompass other fossil fuel companies.
Whether the SEC will also take a more aggressive approach to policing climate change-related disclosure remains to be seen. In 2010, the SEC issued guidance to public companies clarifying situations in which disclosure of risks related to climate change might be required,2 and the agency has received calls, including from members of Congress, to strengthen its enforcement efforts in this area.3