[Senate Hearing 110-952]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 110-952


    CLIMATE DISCLOSURE: MEASURING FINANCIAL RISKS AND OPPORTUNITIES

=======================================================================

                                HEARING

                               before the

                            SUBCOMMITTEE ON
                SECURITIES AND INSURANCE AND INVESTMENT

                                 OF THE

                              COMMITTEE ON
                   BANKING,HOUSING,AND URBAN AFFAIRS
                          UNITED STATES SENATE

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                                   ON

 EXAMINING THE TYPES OF ECONOMIC RISKS AND OPPORTUNITIES POSED AND THE 
CONNECTION BETWEEN CLIMATE CHANGE AND THE HEALTH OF FINANCIAL MARKETS; 
  RISKS AND OPPORTUNITIES DISCUSSED IN CORPORATE FINANCIAL DISCLOSURE 
    STATEMENTS AND WHETHER REQUIREMENTS ARE ADEQUATE; AND LISTEN TO 
   INVESTORS AND OTHER STAKEHOLDERS ON THEIR REQUEST FOR CONSISTENT 
   CLIMATE RISK DISCLOSURE IN ORDER TO BETTER MANAGE FINANCIAL RISKS


                               __________

                      WEDNESDAY, OCTOBER 31, 2007

                               __________

  Printed for the use of the Committee on Banking, Housing, and Urban 
                                Affairs


      Available at: http: //www.access.gpo.gov /congress /senate /
                            senate05sh.html




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            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

               CHRISTOPHER J. DODD, Connecticut, Chairman
TIM JOHNSON, South Dakota            RICHARD C. SHELBY, Alabama
JACK REED, Rhode Island              ROBERT F. BENNETT, Utah
CHARLES E. SCHUMER, New York         WAYNE ALLARD, Colorado
EVAN BAYH, Indiana                   MICHAEL B. ENZI, Wyoming
THOMAS R. CARPER, Delaware           CHUCK HAGEL, Nebraska
ROBERT MENENDEZ, New Jersey          JIM BUNNING, Kentucky
DANIEL K. AKAKA, Hawaii              MIKE CRAPO, Idaho
SHERROD BROWN, Ohio                  JOHN E. SUNUNU, New Hampshire
ROBERT P. CASEY, Pennsylvania        ELIZABETH DOLE, North Carolina
JON TESTER, Montana                  MEL MARTINEZ, Florida

                      Shawn Maher, Staff Director
        William D. Duhnke, Republican Staff Director and Counsel
   Joseph R. Kolinski, Chief Clerk and Computer Systems Administrator
                          Jim Crowell, Editor

                                 ------                                

        Subcommittee on Securities and Insurance and Investment

                   JACK REED, Rhode Island, Chairman
                 WAYNE ALLARD, Colorado, Ranking Member
ROBERT MENENDEZ, New Jersey          MICHAEL B. ENZI, Wyoming
TIM JOHNSON, South Dakota            JOHN E. SUNUNU, New Hampshire
CHARLES E. SCHUMER, New York         ROBERT F. BENNETT, Utah
EVAN BAYH, Indiana                   CHUCK HAGEL, Nebraska
ROBERT P. CASEY, Pennsylvania        JIM BUNNING, Kentucky
DANIEL K. AKAKA, Hawaii              MIKE CRAPO, Idaho
JON TESTER, Montana

                     Didem Nisanci, Staff Director
              Tewana Wilkerson, Republican Staff Director









                            C O N T E N T S

                              ----------                              

                      WEDNESDAY, OCTOBER 31, 2007

                                                                   Page

Opening statement of Chairman Reed...............................     1

Opening statements, comments, or prepared statements of:
    Senator Casey................................................     3
    Senator Menendez
        Prepared statement.......................................    27

                               WITNESSES

Dr. Gary Yohe, Professor of Economics, Wesleyan University.......     5
    Prepared statement...........................................    29
Jeffrey Smith, Partner in Charge of Environmental Practice, 
  Cravath, Swaine, and Moore.....................................     7
    Prepared statement...........................................    45
Mindy Lubber, President, Ceres...................................     9
    Prepared statement...........................................    80
Russell Read, Chief Investment Officer, CalPERS..................    12
    Prepared statement...........................................    95

              Additional Material Submitted for the Record

``Carbon Disclosure Project--Report 2007--USA S&P500: On behalf 
  of 315 investors with assets of $41 trillion''.................   109

 
    CLIMATE DISCLOSURE: MEASURING FINANCIAL RISKS AND OPPORTUNITIES

                              ----------                              


                      WEDNESDAY, OCTOBER 31, 2007

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
     Subcommittee on Securities, Insurance, and Investment,
                                                    Washington, DC.
    The subcommittee met at 2:32 p.m., in room SD-538, Dirksen 
Senate Office Building, Hon. Jack Reed, Chairman of the 
Subcommittee, presiding.

            OPENING STATEMENT OF CHAIRMAN JACK REED

    Chairman Reed. Good afternoon. Let me welcome all of our 
witnesses, thank you very much, and begin the hearing.
    This is a topic that is increasingly more relevant and 
important to all of us, and it is a topic of great concern. 
Today we are dealing with the issue of Climate Disclosure: 
Measuring Financial Risk and Opportunities.
    The purpose of today's hearing is to look at the types of 
economic risks and opportunities posed by climate change and 
the connection between climate change and the health of 
financial markets, also to examine how climate risk and 
opportunities are currently being discussed in corporate 
financial disclosure statements and to determine whether or not 
current disclosure requirements are adequate, and also to 
explore the possibility for improvements and hear from 
investors and other stakeholders on their requests for 
consistent climate risk disclosure in order to better manage 
financial risk.
    Global warming presents a real and serious risk to our 
environment, our communities, and our financial markets. While 
no one can predict the consequences of climate change with 
certainty we do know enough to understand that there are risks. 
These risks include crop damage from more severe droughts, 
damage to coastal communities from sea level increases, more 
intense storms, blackouts that may result from heat waves, and 
many, many other potential risks.
    I believe it is in our self-interest to manage the risk and 
find ways to mitigate global warming while attempting to adapt 
to the upcoming changes and identify business opportunities to 
reduce carbon emissions.
    There is a growing awareness among analysts, investors, 
businesses, government officials, and other stakeholders that 
climate change not only poses risk but can create new 
opportunities in the financial sector. Major environmental risk 
and liabilities can significantly impact companies' future 
earnings and, if undisclosed, could impair investors' ability 
to make sound investment decisions. But at the same time, a 
corporation or investor can profit from environmental 
innovation such as the development of new energy-efficient or 
renewable energy technology.
    The cost associated with more extreme weather events, 
regulations to curb greenhouse gas emissions at the global, 
regional, state, and local level, growing global demand for low 
carbon technologies, and the increasing geographic spread of 
infectious diseases are just a few of the ways that climate 
change is likely to ripple through the U.S. and global economy. 
With these risks, as I mentioned before, however, come some 
opportunities. Companies in many sectors can increase their 
profitability by implementing energy-efficient strategies and 
developing emission reducing technologies and products whose 
value is enhanced by global efforts to reduce greenhouse gas 
emissions.
    In September 2007, the Carbon Disclosure Project released 
its fifth survey. The CDP represents 315 institutional 
investors with assets of $41 trillion, or more than one-third 
of the total global invested assets. Fifty-six percent of S&P 
500 companies answered the survey. Of those responding, 81 
percent of the companies reported that they regard climate 
change as posing a commercial risk, and 69 percent of those 
firms also considered it an important business opportunity.
    While the majority of the S&P 500 companies participated in 
the survey, the CDP also conducted a review of Form 10K 
securities filings and found that climate change disclosure was 
rare.
    There is an old adage in business, ``what gets measured 
gets managed.'' Investors recognize this and they are calling 
for greater climate disclosure, both voluntary and mandatory.
    In September, a broad coalition of investors, State 
officials with regulatory and fiscal management 
responsibilities, and environmental groups filed a petition 
asking the SEC to issue an interpretive release to clarify that 
publicly traded companies must assess and fully disclose their 
financial risk and opportunities related to climate change 
under existing law. The 22 petitioners include leading 
institutional investors in the United States and Europe, 
managing more than $1.5 trillion in assets.
    In addition, the number of shareholder resolutions on 
climate change is increasing from six in 2001 to almost 50 in 
2007. These resolutions now account for over 10 percent of all 
shareholder resolutions that are filed. Public disclosure about 
global warming has largely focused on the scientific debate and 
the environment consequences. As the science has become 
stronger and the need for action more compelling, global 
warming is getting increasing attention in corporate boardrooms 
and from investors and the market is responding. However, 
markets work best when they have accurate information, 
informational transparency is therefore vitally important if 
financial markets are to price climate risk and opportunities 
efficiently.
    In addition to today's hearing on climate disclosure I 
think it is also important for the Subcommittee to consider the 
emerging financial market in emissions and carbon trade. The 
global effort to reduce the emissions of greenhouse gases that 
has led to the creation of large and rapidly growing carbon 
markets around the world is something that has to be reckoned 
with. According to the World Bank, the global carbon market 
grew from approximately $10 billion in 2005 to over $30 billion 
in 2006. Some credible private estimates put the global market 
at over $50 billion in 2007.
    While it is difficult to predict with precision, the 
enactment of a mandatory cap and trade bill in the United 
States would create the largest carbon market globally. In the 
EU Emissions Trading Scheme, carbon trading occurs both over-
the-counter and on exchanges with significant participation by 
some of the largest regulated financial institutions. It is 
expected that a U.S. cap and trade program would develop 
similarly.
    Today's hearing is an opportunity to learn from our 
witnesses about what economics is telling us about climate 
change, the connection between climate change and the health of 
financial markets, and the type of information investors need 
to make sound decisions in the marketplace. It is also an 
opportunity to examine voluntary and mandatory mechanisms for 
climate change and climate risk disclosure by public 
corporations, whether current disclosure is adequate, and the 
need for the SEC to offer guidance for climate risk disclosure.
    I want to recognize now my colleague, Senator Casey, for 
his opening comments. Senator Casey.

              STATEMENT OF SENATOR ROBERT P. CASEY

    Senator Casey. Mr. Chairman, thank you very much.
    I want to thank you for calling us together today. I want 
to thank our witnesses for bringing their expertise and 
experience to bear on these questions, and also for the time 
they took to travel here and to present testimony.
    I have just a brief opening statement. First of all, to 
thank the Chairman for bringing this issue to the fore. This is 
an issue or these issues we will discuss today are issues that 
are not often talked about in the same context, often not in 
the same paragraph if not in the same galaxy. People do not 
think of climate change and investment strategy in the same 
place. But we know that that is not the case, that they are 
closely interrelated.
    Like a lot of Americans, one of the most searing images 
that I remember on the issue of climate change was brought 
home--a lot of them obviously--a motion picture that did it for 
many Americans. But I remember the picture on the cover of Time 
Magazine in 2005. I cannot remember which week, but with the 
polar bear on the small piece of ice and all around him is 
water, presumably that melted around that ice piece.
    I will never forget one fact in that article, and you did 
not have to be a scientist or a climatologist or any kind of an 
expert for this to come home to you, and it certainly did for 
me, where they said that since about 1970, roughly 35 years, 
the percent of the Earth's surface which has been the subject 
of drought had doubled, had doubled. Now you do not need much 
expertise to know that when that kind of drought occurs and 
that kind of landmass has drought connected to it, over time 
that leads to hunger and darkness and death for the human race, 
for the human race that is affected by that drought. So this is 
an urgent priority.
    At the same time, we all have strong feelings on the 
question of climate change. Most of us in this room, and in 
most rooms in the country, would say we have to make good 
investments. In the context of investments that pertain to 
financial investments, whether it is pension fund investments 
or other investments of public dollars--not to mention private 
investment--you want to do it in a way where you get a good 
return and you do it prudently and you do it based upon the 
best evidence available for that investment.
    So for all those reasons, when I was--in the 2 years I was 
a State Treasurer of Pennsylvania, I thought my obligation was 
not just to do the basic job of being a State Treasurer, but 
was to think beyond the boundaries of normal investment 
strategy and to think of other ways to get a good return on 
investment in connection with an important priority like 
climate change.
    So what we did in Pennsylvania in two short years, and I 
think it bears repeating, I think, in other parts of 
government, especially at the Federal level, and other States 
have done many of these things as well. I do not claim to be 
the author of all of these. But the first thing we did was we 
created a Keystone Green Fund, a new investment, which we 
established to attract and leverage private sector investments 
in clean technology projects. Many of you have heard of those 
kinds of efforts in States.
    No. 2, we had an active equity management initiative where 
up to $50 million in State assets were invested so that we 
could place those assets with investment managers who had a 
demonstrated track record of providing superior returns on 
their investments in clean technologies.
    And then the last two things we did are even more 
applicable for today: environmental equity screens. Our 
department, at that time, developed new investment screens for 
its managers and outside consultants, the firms and individuals 
you retain to invest public dollars in an appropriate way. We 
wanted to use those screens when evaluating a company's 
potential exposure to environmental liabilities, all part of 
good, hardheaded financial investment strategy.
    And No. 4, we joined a national organization which many 
people in this room know about, the Investor Network for 
Climate Risk. We formally joined that network, which as some 
people in the room know, is a network of institutional 
investors and financial institutions that promote better 
understanding of financial risks and investment opportunities 
posed by climate change.
    So I think that there are great possibilities for the 
Federal Government to chart a brand-new course in this area. I 
know some initiatives are underway. I think Senator Reed 
calling this hearing is one opportunity to explore such 
strategies, where we can literally equate and work on two sides 
of--two ends of a problem, I should say. One is the challenge 
posed by climate change, challenge to our environment, 
challenge to human life literally. And on the other hand, get 
good returns on those investments, especially in the area of 
clean technology.
    And oh, by the way, we can create jobs, too. So the old 
false choices of picking the environment over jobs or picking 
good environmental or climate policy as opposed to good 
investment policy, all those dichotomies I think are shattered 
in large measure because of what we know now.
    And for all those reasons, Mr. Chairman, I am happy to be 
here and honored that you would bring these experts together.
    Chairman Reed. Thank you very much, Senator Casey, for your 
very eloquent words and also your insights as a former 
treasurer who had the responsibility to invest and do it in a 
conscientious way. Thank you very much.
    Let me now introduce our panel. We are very pleased to be 
joined this afternoon by experts in the field. Let me first 
begin by introducing Dr. Gary Yohe. Dr. Yohe is a Professor of 
Economics at Wesleyan University and the recent Nobel Prize 
recipient for his work on the International Panel on Climate 
Change.
    I did not see you being interviewed with Al Gore. I guess 
you were out of town. I understand.
    His work has focused attention on both mitigation and 
adaptation to climate change and tools to try to manage the 
risk of climate change in an uncertain world.
    We are then joined by Mr. Jeff Smith who is the Director of 
the Environmental Practice Group at Cravath, Swaine, and Moore 
Law Firm. The group also provides day to day counseling on 
environmental management and corporate governance issues, 
environmental issues of interest to the SEC, shareholder 
relations involving environmental matters, and environmental 
litigation. Mr. Smith recently completed a 3-year term as 
Chairman of the American Bar Association's Special Committee on 
Environmental Disclosures. Thank you very much.
    Ms. Mindy Lubber is President of Ceres, a U.S. coalition of 
investors and environmental organizations working to improve 
corporate, environmental, social and governance practices and 
Director of the Investor Network on Climate Risk, an alliance 
that coordinates U.S. investor responses to the financial risk 
and opportunities posed by climate change.
    And finally, Mr. Russell Read is the Chief Investment 
Officer for CalPERS, the nation's largest pension fund that 
manages $250 billion of retirement funds for 1.5 million 
California retirees. Mr. Read is responsible for the Strategic 
PLAN for CalPERS Investment Office, including tactical asset 
allocation, risk management, business development and new 
investment programs.
    Thank you again for joining us. I have had an opportunity 
to look at all the statements. They are excellent, they are 
detailed, they are analytical. I will ask you, though, to 
contain your verbal comments to about 5 minutes so that we can 
get through the panel and Senator Casey and I will have an 
opportunity to ask questions. Thank you very much.
    Dr. Yohe, would you please begin?

 STATEMENT OF DR. GARY YOHE, PROFESSOR OF ECONOMICS, WESLEYAN 
                           UNIVERSITY

    Mr. Yohe. Mr. Chairman, Senator Casey, members of the 
Subcommittee, thank you so much for your invitation to present 
some testimony based on my work as an economist and also as a 
senior member of the Intergovernmental Panel on Climate Change.
    You asked me to talk a little about how economics can 
inform national and global responses, a little about what the 
Stern Review contributed to the landscape, a little about what 
the IPCC has contributed, and then to connect it all to the 
health of financial markets. It is difficult to do all of that 
quickly. I did provide, as you noted, some remarks and some 
details, so I will try to hit the highlights.
    My testimony is anchored on a fundamental conclusion that 
emerged from both the IPCC Fourth Assessment Report and the 
Stern Review: economics can play a significant role in 
understanding how we should respond to the risks of climate 
change. My take is that this role will be productive in policy 
deliberations only if the practitioners accept the shortcomings 
of cost-benefit analysis of the problem and begin to adopt a 
risk management approach to the problem.
    I was pleased to note that both Senators spoke specifically 
about climate risks and a lot less about costs versus benefits 
in their opening remarks.
    Both the Stern Review and the IPCC Fourth Assessment Report 
describe a climate that is changing faster than anticipated 
just 5 years ago. Significant impacts are being calibrated in 
many metrics, some are economic, but some are now being 
expressed in terms of human lives at risk, risks to unique and 
threatened ecosystems, and so on.
    Perhaps more critically, many of the temperature thresholds 
that could trigger critical impacts are thought to be lower 
than we thought just five years ago. This suggests that the 
associated risks are closer in our future than earlier 
anticipated.
    It is perhaps with respect to the risks about which you are 
having conversations and deliberations most important to 
recognize that achieving no specific concentration target will 
guarantee you achieving a particular temperature target or 
temperature threshold in terms of increases in global mean 
temperature. That is to say, the best you can talk about in 
terms of policies that you think about on the adaptation side 
or the mitigation side is reducing or mitigating the risks 
associated with certain thresholds. Guarantees are just not 
going to happen.
    Some of these risks are identified in the tables that I 
have sent to you. Translating them into dollars and cents is an 
extraordinary challenge, and some might say that we have failed 
to meet that challenge. Economists do know that they should be 
measuring the social cost of carbon. More than 200 estimates 
are now available, but they are far from comprehensive in their 
coverage of potential damages. Depending on how heavily the 
future is discounted heavily and how equity concerns are 
incorporated in the calculations, even negative ``costs'' are 
possible. The median estimate for a 3 percent discount rate is 
about $20 a ton of carbon. That is about $5 a ton of carbon 
dioxide.
    The Stern Review, though, reports an estimate of $85 a ton 
of carbon dioxide.
    So what's the deal? Many of us (I have included some of the 
testimony that I made about Stern last February) feel that 
Stern was right for the wrong reason. There is an economic 
reason for immediate action based on identifying a risk that is 
``dangerous'' and recognizing that climate policy is an 
imperative. As soon as that happens, temperature thresholds can 
be identified and associated probabilistically with 
concentration targets. Since concentrations depend on 
cumulative emissions, the climate policy problem becomes an 
exhaustible resource problem for which the least costly 
approach is well established: set an initial scarcity rent 
immediately and arrange for it to increase at the rate of 
interest in a predictable and persistent way. The policy can be 
implemented by trading permits or setting a carbon tax. I tend 
to favor a carbon tax, but that is entirely a different story.
    It is essential that the Senate and others who worry about 
climate change for the United States and the globe recognize 
setting policy in 2007 or 2008 that will solve the problem once 
and for all is impossible. Current deliberations need to be 
informed about the long-term risks as you indicated, but you 
need to work to set near term policy in terms of promoting 
``carbon friendly'' investments that will be undertaken at the 
appropriate time (so that they will not be particularly 
expensive) and avoid locking the economy into high carbon 
decisions.
    In short, a significant mitigation is in our future. 
Ignoring climate policy in economic decisions will be just as 
unsustainable for business in the United States and around the 
world as ignoring climate risks.
    Thank you very much.
    Chairman Reed. Thank you very much, Dr. Yohe.
    Mr. Smith, please.

STATEMENT OF JEFFREY SMITH, PARTNER IN CHARGE OF ENVIRONMENTAL 
              PRACTICE, CRAVATH, SWAINE, AND MOORE

    Mr. Smith. Chairman Reed, Senator Casey, thank you very 
much.
    In addition to your kind introduction, I should note that I 
have been practicing environmental law for 27 years, 
principally at the intersection of environmental law and 
business issues, and that I have had the opportunity and 
sometimes the pleasure to review thousands of pieces of 
environmental disclosure. Notwithstanding that experience, 
which I hope to make of use to the Committee, I am speaking on 
my own behalf, not on behalf of the ABA or my firm or my 
clients.
    Investor interest in climate change is at a volume and 
level of sophistication that is unprecedented in my experience. 
Superfund and asbestos, which were both substantial issues, run 
a distant second.
    This has had several significant consequences over the past 
5 years. There has been a dramatic rise in the number of 
shoulder resolutions and in the level of support of those 
resolutions. There has been a development of an unprecedented, 
sophisticated, robust and often third-party verified voluntary 
disclosure marketplace, particularly involving companies in the 
energy sector with high sensitivity to climate change issues. 
And in these reports, companies often share substantial 
baseline data and strategic decisions and analyses with 
investors.
    There has also been a coalition of public forces, typically 
State Attorneys General and--as Senator Casey noted--State 
Treasurers, and private and pension money to drive the 
shareholder resolution agendas and the disclosure agenda.
    Against this recent backdrop, there are long-standing, 
broad and flexible SEC disclosure regulations that have 
governed environmental disclosure for over 30 years. They have 
led, often after guidance from the SEC, to significant and 
still evolving disclosure across all market sectors from a 
variety of legal technically challenging environmental topics, 
ranging from Superfund, to the 1990 Clean Air Act to the 
cluster rules for pulp and paper in the late 1990's, as well as 
all types of environmental litigation.
    Briefly, the regulatory construct is contained within Reg 
S-K and Reg S-X and includes Item 101, which requires 
disclosure of material capital expenditures and the cost of 
compliance with environmental law, including any laws 
implicating climate change; Item 103, which requires disclosure 
of material litigation to which a company or its property could 
be subject; and Item 303, which requires disclosure of material 
known trends and uncertainties and gives investors an 
opportunity to look at the company and its prospects and its 
challenges through management's eyes.
    For financial statement disclosure, the operative principle 
is embodied in FAS 5, which requires accrual of a contingent 
loss when it is both probable that it has been incurred and the 
amount is estimable. This provision, which is subject to 
substantial accounting art--and I'm not an accountant--strikes 
a balance between two competing forces. On the one hand, 
matters should be kept out of financial statements until they 
are more likely than not real and a value can be fairly placed 
on them. There is arguably nothing more misleading to the 
market than ill supported math.
    On the other hand, guidance to FAS 5 makes clear that 
recognition of a liability cannot be delayed until the event is 
certain or there is only one estimate of a loss. Beyond a 
point, a company should not be able to hide behind uncertainty. 
Material surprises also disrupt markets.
    Woven throughout these regs and overarching all of 
securities law under the 1933 Act and the 1934 Act is the 
concept of materiality. This is a highly significant filter 
that separates the important from the trivial. This is a 
flexible standard and case law and litigation emphasize that it 
is non-numerical. It is nevertheless important to be precise 
about how to use it in the climate change context.
    The standard is that the event or the loss must be material 
to the company from the perspective of a reasonable investor, 
not material to society at large or significant to a large 
number of investors. While no one can seriously dispute the 
importance of climate change as a societal issue, there are 
nevertheless many companies for which it is not now and may 
never be a material issue. It would be a mistake to make 
everyone say something.
    Similarly, even for companies at the heart of greenhouse 
gas emission issues, certain types of information are not now 
and may never be material. The cost of carbon credits, for 
example, may soon be material to a coal burning utility in Ohio 
but the physical risk to its own plants from the effects of 
climate change may never be. Even companies that should say 
something should not be compelled to say everything.
    In the past, the SEC has responded to market demands for 
information with successful guidance and clarification about 
how to act. For example, after the passage of Superfund between 
the mid-1980's and early 1990's, prompted in part by guidance 
from the staff, substantial and increasingly precise amounts of 
information became available to investors about liability for 
hazardous waste contamination.
    On a shorter time fuse, through the workings of a Staff 
Legal Bulletin, the SEC was successful in prompting disclosure 
about public company preparedness to address the millennium bug 
which, like climate change, had potentially far-reaching market 
consequences.
    The way forward consists of some to-dos, in my view, and 
some not-to-dos. The to-dos are very simple. The SEC should 
clarify in a reasoned and considered way the application of 
time-tested disclosure principles to climate change. The SEC 
should also keep the business effects of climate change on its 
regular agenda so that, as with Superfund, changing 
circumstances can lead to evolving requirements.
    The not-to-dos include these: do not abandon or 
substantially expand or to modify time-tested disclosure 
principles. They work and they can and should be made to work 
in this instance. Do not take any action that risks flooding 
the market with untested data or unprovable assumptions. This 
will undermine investor confidence, obscure evolving business 
truths and burden companies with the obligation of gathering 
and reporting information that would ultimately be of no 
lasting value. And finally, do not let the voluntary disclosure 
marketplace supplant mandatory disclosure. The voluntary market 
is robust, energetic and valuable at the moment, but it is 
unfiltered and unordered. The SEC should reassert its role as 
the gatekeeper of material information on climate change for 
the marketplace.
    Thank you, Senator.
    Chairman Reed. Thank you very much.
    Ms. Lubber, please.

          STATEMENT OF MINDY LUBBER, PRESIDENT, CERES

    Ms. Lubber. Thank you, and thank you for having me.
    It is a pleasure to be here, Mr. Chairman. When I was the 
Regional Administrator of the EPA, you led on many great things 
in New England, and I thank you.
    Mr. Casey, when I founded the Investor Network on Climate 
Risk, it was leaders like yourself who really saw the vision of 
bringing together and marshaling the forces of investors, 
investors like you, like Mr. Read to my left in taking a 
leading role on the financial impacts of climate change on what 
it takes to address that.
    We all know that addressing climate change is a multipart 
very complex situation. Thinking about bringing our carbon 
footprint down by 80 percent by the year 2050 is complex, is 
not going to happen tomorrow, but at the same time mandates and 
requires every ounce of our energy. But we also know it is a 
step-by-step process. It is building one block after another.
    The block that we are talking about today, I would argue, 
is very doable, can be done in the short term, and will have a 
marked difference on the overall effort to address climate 
change and mitigating its impacts and eventually getting to a 
point where we bring that carbon footprint down by the year 
2050.
    Today we are talking about the issue of material 
information of companies assessing their climate risk--and I do 
believe once they assess the problem, they act on it--better, 
and disclosing it, disclosing it in a way that investors 
understand the risks to a company and the opportunities to a 
company.
    The solution to that disclosure, to that important 
information in the marketplace, is fairly straightforward. The 
SEC, whose job it is to provide adequate information to the 
investor community of publicly traded companies is obligated to 
make sure that material risk and opportunity is disclosed so 
people can make adequate decisions. For whatever reason, there 
is a logjam.
    What we are talking about today is not solving the entire 
problem of climate change but taking a very important step that 
could be led by leaders such as yourself to help break a 
logjam, to ask the SEC to issue interpretive guidance that 
their present rules and regulations that are in place, nobody 
is looking for a new statute necessarily or a new set of 
regulations that need to be promulgated. As a former regulator, 
I know full well that that can be complex, 500 pages, years of 
deliberations.
    What we are looking for is a memorandum to remind companies 
that they ought to be disclosing material risk of climate 
change.
    There is a very simple message I am trying to convey to 
your Committee today and it is that investors and capital 
markets have an important role to play in tackling global 
warming. But marshaling that market power to address this 
colossal challenge requires investors getting the information 
they need from companies about the risks and the opportunities 
they face from climate change.
    Right now the information companies are providing on 
climate change is just not adequate. It is not at the level 
investors need, in most instances. There are great examples, 
Johnson Controls, Dow, Dupont, who are doing it. It is not 
impossible, it can be done, and it is being done. But not in 
enough instances and not uniformly. We need to make sure that 
investors have the informed information they need to make good 
decisions.
    Action by the Securities and Exchange Commission to rectify 
the situation is manageable, it is doable in the short term, 
and no doubt your leadership can make it happen.
    Before getting into a few specifics, let me provide some 
brief background on why investors managing trillions of dollars 
in assets are concerned about climate change and what they are 
doing to encourage better climate risk disclosure from U.S. 
companies as an important step. Investors recognize that 
climate change is real, that it poses enormous financial risks 
and opportunities to each of their portfolios. Prolonged heat 
waves, the kind of horrors we saw in New Orleans, those kinds 
of physical changes are billion-dollar implications to our 
economy. Emerging carbon reducing regulations have hundreds of 
millions of dollars of impact on many companies that are 
regulated. And the growing opportunities for climate friendly 
technologies and products are just a few of the ways that 
climate change is already rippling across our economy and 
across dozens of business sectors from insurance to 
agriculture, to electric power, tourism, and transportation.
    And opportunity related disclosure, the upside of 
addressing climate change, is especially important because 
climate change offers significant new business opportunities 
for investors and companies such as investing in and developing 
clean technologies and renewable energy.
    To evaluate how companies and sectors will be affected by 
climate change, investors need better information. How will 
power companies building new coal-fired power plants be 
affected by regional and Federal carbon limits? And how will 
insurers and agricultural companies be impacted if severe 
droughts--as we are seeing now in the Southeast and are 
experiencing--become more common? And which automakers are best 
positioned to seize the opportunities that will be created by 
new, tailpipe emission limits and tougher fuel efficiency 
standards? These are material issues, material risks that 
investors need to know.
    In an effort to get that information, investors have filed 
dozens of shareholder resolutions with companies over the 
recent years requesting more and more information about their 
risk exposure and their response strategies to climate change. 
And they have sent disclosure requests to 50 large power 
companies and 30 large insurance companies and they have joined 
hundreds of investors worldwide to send voluntary risk 
disclosure questionnaires.
    These efforts have resulted in some U.S. companies 
improving their disclosure, but they are the exception rather 
than the rule. Despite a groundswell of demand from investors 
for more information on the business impacts, corporate climate 
disclosure continues to be scant, inconsistent, and not always 
addressing maternal issues. This needs to change. The 
Securities and Exchange Commission can and should use its 
existing authority to make this happen.
    In final, 6 weeks ago 18 leading investors, including 
Russell Read to my left representing CalPERS, filed this 
petition asking the SEC to require companies to assess and 
disclose their financial risks from climate change. The 
petitioners included $1.5 trillion of investors, investors from 
across the country, California, Florida, New Jersey, New York, 
North Carolina, and Rhode Island.
    Climate risk disclosure, without question, falls squarely 
into the category of material risks that companies should be 
disclosing in their SEC filings. The petition requests, because 
after being asked for 4 years and the SEC has been 
nonresponsive, the petition more formally requests that the 
Commission formally issue interpretive guidance clarifying that 
material climate related information must be included in 
corporate disclosures under existing law.
    I want to emphasize that the petitioners are not seeking an 
onerous new disclosure regime. They are just asking that 
because climate risk varies between sectors and could change 
because of quickly evolving regulatory regimes and new 
scientific information, that we issue general guidance from the 
SEC as suggested in the petition.
    The bottom line, efficient markets depend on the 
availability of information. The SEC can and needs to do more 
to ensure that this information makes its way into the 
marketplace to allow for a number of things: investors to make 
good decisions, companies to understand their risk, and in my 
judgment they will act on that risk when they look at it, and 
to further the discourse. I believe this will take an important 
step in addressing the world problem we are facing of global 
warning.
    Thank you.
    Chairman Reed. Thank you very much.
    Mr. Read, please.

  STATEMENT OF RUSSELL READ, CHIEF INVESTMENT OFFICER, CALPERS

    Mr. Read. Chairman Reed, members of the Committee, thank 
you for inviting me here today.
    I am pleased to speak today on behalf of America's largest 
pension system, the California Public Employees Retirement 
System, also known as CalPERS. We provide pension and health 
benefits to 1.5 million public employees, retirees, and their 
families. We have more than $250 billion invested in the 
market.
    Since investment income typically pays over 75 cents of 
every pension dollar, we rely on sustainable and compelling 
long-run returns to make sure that the money will be there down 
the road for California's public employees. Sustainability is 
the key word here. We are in a marathon, not a sprint. This is 
about sustainable portfolio companies, a sustainable healthy 
economy needed by these companies in order to thrive, and 
sustainable natural resources.
    Across our diverse investment portfolio, CalPERS has 
committed several billion dollars to those programs, managers, 
technologies, and companies which can offer both compelling 
investment returns as well as substantial long-term 
improvements in the environment. Sustainability is why we are 
investing specifically in alternative energy and conservation 
ventures, why we are pushing companies to fully report carbon 
emissions that may harm the environment, and why we are urging 
government leaders to create incentives and penalties to 
protect the environment. Without such efforts, we risk sawing 
off the branch that we are sitting on.
    Increasing evidence indicates that climate change presents 
material risk to numerous sectors of the economy. These risks 
may be operational, market, legal, regulatory, or reputational 
in nature. Some companies are voluntarily including climate 
risk and sustainability reports or more general corporate 
responsibility reports. However, many companies are not 
disclosing their climate risk or strategies for dealing with 
these risks at all. This makes it impossible to assess 
companies' long-term financial prospects, at least with respect 
to key environmental challenges these companies might face.
    From our standpoint, voluntary disclosure is not enough. 
Those who voluntarily disclose often lack the material 
information needed to properly assess their environmental 
sensitivities. To make matters worse, there is little 
consistency in format or in detail, making it nearly impossible 
to compare the environmental and carbon footprints of different 
companies.
    The information tends to be directed to environmental 
interest groups or the general public but not to investors. 
Given the significance of climate risk for major companies in a 
new carbon constrained world, reporting on carbon risk could 
and should be standardized. It should not be a virtue. It 
should become an obligation and it is quickly becoming a 
necessity for prudent investment decisionmaking.
    Yet it is not just risk that we are interested in, but 
equally we are interested in the opportunities that are created 
by better disclosure. For example, CalPERS has committed over 
$600 million to clean technologies and products that reduce 
emissions, to manufacturing processes that minimize the use of 
natural resources, and to systems that do not contaminate air, 
water or land. We have also earmarked $500 million for managers 
who screen companies for compliance with environment 
guidelines. And we have set an energy reduction goal of 20 
percent over the next 5 years for office, retail and industrial 
and apartment properties totaling tens of billions of dollars 
in value.
    We are also engaging companies in the airline, auto, 
utilities and oil and gas industries that are under performing 
compared to industry peers and that lack disclosure. You may 
ask isn't this SEC petition a case of regulatory overkill?
    Let me close with the results of a survey of 265 global 
power companies that we published with a sister pension fund to 
show why disclosure is so essential. Only 25 of those 265 
companies had complete information about the energy costs, 
emissions, reduction programs, and targets and emissions 
trading agreements. So take a guess, how many of those 25 
companies created overall economic value after subtracting for 
the cost of their carbon footprints? The answer is six. Six of 
the 25 companies added value to the economy.
    What about the other 240 companies for which we have little 
or no information? Investors are working blind with those other 
companies. This is the kind of information that investors need 
and are not getting but will be material in our evaluation in 
the future. Without your help it is unclear whether the SEC 
will do the right thing here and set the environmental and 
carbon reporting standards that will prove critical to 
investors and corporate America alike.
    Thank you for your attention to this important issue, and I 
am happy to answer any questions.
    Chairman Reed. Thank you very much.
    Thank you all for excellent testimony and also for 
observing scrupulously the convention of 5 minutes, which we do 
not so we appreciate at least the witnesses cooperating.
    Dr. Yohe, you mentioned in your testimony that we should 
essentially move away from cost-benefit analysis and embrace 
risk management approach. Can you talk about that in terms of a 
specific company? For example, how would that differ from what 
is being done at the moment?
    Mr. Yohe. A specific company might try to envision climate 
risks that it face when it considers its business conditions in 
a warming environment. It might also want to take the 
regulatory environment that it faces on carbon, its location, 
and other factors into account. I think that it would, at this 
point, be nearly impossible to for such a company to simulate 
the range of costs and benefits (in terms of climate change) 
for any investment that it might be considering.
    Firms could, however, look at a range of possible options 
and cast them in terms of metrics of climate-related risks that 
maybe are not even calibrated in terms of economic measures. 
They could thereby achieve a wider understanding of their 
carbon footprint, and their significance in their 
profitabilities. This information could then be conveyed to 
their shareholders, to their customers, and to the other people 
who have a vested interest in their material risk.
    Chairman Reed. I think part of this is--the challenge 
really is trying to get this in a way that is understandable by 
the investing public. There is some sophisticated investment 
analysts but there is also some one just reading the proxy 
statement here and there. Are you suggesting that it is so 
complicated that it might not be ever reduced to something that 
could be measured by dollars?
    Mr. Yohe. I am suggesting that this could easily be the 
case. Conceptually, in business boardrooms and in rooms like 
this where decisions are made about climate change and climate 
policy, measuring climate risk and/or climate change 
contribution will be very difficult for a very long time.
    If you are then thinking about asking firms to subtract the 
value their carbon footprints from their bottom lines to 
determine the degree to which they contribute to social damages 
calibrated across the planet, then you have a problem.
    How do you cope with estimates of the carbon footprint that 
range from -$3 per tonne of carbon up to $100 a tonne? Your, 
and their, calculus would depend on a wide range of numbers. 
And which one do you want to use? Is it the material risk of 
the customers with which firms are conducting business? Or are 
would you allow firms to look at firms' (global) social cost of 
carbon ``footprints''?
    Depending on what you decide, shareholders will get 
extraordinarily different answers to their concerns about 
``material exposure''.
    Chairman Reed. Ms. Lubber, you have a comment, too?
    Ms. Lubber. I think we can make it much more contained, 
controlled, understandable and disclose material risk. I would 
argue is not quite that difficult. When we talk about, No. 1, 
what kind of disclosure are we looking at? What is the 
information that investors might benefit from? Be it me, if it 
is $4,000 in the company or Mr. Read who is managing $260 
billion the last time I looked but he might correct me being 
off by a few billion.
    That is the first is regulatory risks. For a company that 
is about to build four coal-fired power plants, they could take 
a look at the regulatory schemes that are being negotiated in 
Congress. Material risk does not demand precise provision. But 
one can tell that given that a coal-fired plant lasts over 40 
years, if the laws change and there is a price on carbon, there 
will be real cost to that electric utility company. They can 
calculate it, they can disclose it. Investors would want to 
know whether that next coal-fired power plant is going to cost 
$60 million or $160 million.
    There is risks like increased storms. Insurance companies 
have 300 risk assessors on staff. They know how to assess risk 
from storms. Until last year most of them were only assessing 
based on the year before, not the 5 years in the future or 10 
years. The reality is they can make assessments on what kind of 
risks they face. And it is the insurers who have had a 
painfully low disclosure rate.
    So when we are looking at assessing physical risks, and one 
can make predictions based on scenarios, looking at regulatory 
risk, looking at the very real litigation risk that is growing. 
There are more and more companies at the wrong end of 
litigation, whether it is State Attorneys Generals or other 
litigators, those are real financial risks that I, as an 
investor, want to know. Is this company I am putting money in 
about to be sued? Is the cost of the product they are putting 
out about to go up exponentially because a price is being put 
on carbon? Those are real material risks. They can be 
calculated. There are standards out in the marketplace. That is 
the kind of information we are looking for and is crucial for 
investors to have when building a portfolio.
    Chairman Reed. Thank you.
    Mr. Read, this is an opening to a huge topic and your 
response would be appreciated.
    Mr. Read. When I look at the issue, I think in terms of the 
financial tools that are used by financial analysts and 
specifically financial efficiency ratios that are used all the 
time. I think what we are talking about here is the 
introduction of carbon efficiency ratios. This is something 
which I think could be put out in some very compelling and 
intuitive ways, things that would be accessible to investors on 
a broad basis, that would be important to the marketplace, and 
could be digested I think relatively unambiguously.
    So when you think of these sorts of efficiency ratios, you 
think of, for instance, things that could be a carbon-to-sales 
ratios. Carbon sales ratio could be an example of it. There is 
a whole analog to carbon efficiency ratios that are analogous 
to the standard financial ratios that we look at all the time.
    Chairman Reed. Thank you.
    I wanted to pose a general question to Mr. Smith first but 
allow individual panelists to comment briefly, and then I am 
going to recognize Senator Carper who has joined us. But there 
will be a second round because when Tom is finished I will 
initiate a few other questions.
    I was particularly struck and included in my statement the 
Carbon Disclosure Project survey, which suggest that if you ask 
a company privately is there a huge risk out there because of 
climate change, 81 percent say of course there is. Are there 
opportunities? Well, that is 69 percent, of course there is.
    But then you look at their disclosure and there is nothing 
like that. Mr. Smith you represent a lot of companies. Is it 
because they do not have the right guidance to disclose? Is it 
because there are rational business reasons?
    Mr. Smith. Senator, I think there are a variety of reasons 
and I think this where I part company a little bit or maybe a 
lot with the other witnesses. That is, the hard truth, and it 
is very difficult for us to digest faced with the physics of 
the crisis at the moment, is that there are some things that 
are just fundamentally unknowable at the moment. And I think 
there is a great harm to the marketplace to put disclosure, 
particularly numerical disclosure, on something that is 
fundamentally unknowable and unquantifiable. Whether you want 
to make up a metric and drop it on top, there are other sorts 
of ways.
    But I think the disconnect between projects such as the 
Carbon Disclosure Project, which are very valuable on their own 
terms, and 10Ks is not as great as it would seem. Because I 
think that responsible leadership in most responsible companies 
has the same view as the societal view. This is a medium to 
long-term risk which is going to be costly to correct, that we 
have to act on it soon because of the factors that Dr. Yohe 
described, and that there are also opportunities in that 
process.
    When you take it down the funnel and say what does this 
mean for me now, then you come up with a very different 
calculus. You may well be, to take my coal-burning utility in 
Ohio, you may know or may feel or your advisors here on the 
Hill may tell you that it is inevitable or virtually inevitable 
that there will be some sort of Federal legislation on this 
issue. But it is still a challenge, notwithstanding the 
immediacy of that event, it is a tremendous challenge to say 
what the consequences of that will be, what the shape of that 
legislation is going to be. And then to quantify what the costs 
of that might be to you.
    And to disclose that on a contingent basis, that is to say 
we believe based on best information here are the range of 
legislative outcomes, and based on our internal calculations 
here is the range of costs which each of these outcomes could 
impose on our company, that would really be more than a full-
time job and I think not really ultimately all that helpful to 
the marketplace.
    On the other side of the equation, I think what we would I 
would urge is the SEC and obviously the marketplace generally 
needs to be poised really almost by the minute because the 
speed of these developments from a regulatory standpoint and 
from a financial standpoint has really been staggering. I think 
there needs to be a nimbleness so that there is a constant 
attention and evolution of what is useful but based on what is 
truly useful and not what can be made up as a number that 
placates people who are looking for numbers. Fake numbers are 
bad.
    Chairman Reed. But would you suggest that there has to be 
at least an indication in these disclose materials that this is 
a factor? Even if you cannot quantify it. And that second--and 
what you presuppose is a very rational thoughtful process of 
evaluating and making a judgment that is not material, the 
question exists is that process going on in many boardrooms? Or 
is simply not a topic that is even--this is so far out of our 
perspective that we do not even worry about that stuff?
    Mr. Smith. My view, and I think I have a fairly wide-based 
view but it's not an exclusive view I believe, is that it is 
going on in a lot of board rooms. It has become rapidly and 
over the course of the last 2 or 3 years at least a weigh 
station and a checkpoint for most responsible boards, 
particularly boards in industries where there is likely to be 
an immediate effect, the automotive industry, the power 
industry, the aluminum sector, the steel sector, anybody who is 
carbon rich, carbon emission rich, and intensive.
    And also I think, interestingly, the fact that we are, in 
effect, trailing European markets on the cost of carbon because 
there is an active auction market there, as you know, and there 
is a unit price. We do not live on an island or in a glass 
house and so there are many U.S.-based companies that have 
operations in the European theater who have now the capacity 
and ability and who do disclose with numerical specificity the 
cost of carbon to them in their operations. I have cited some 
examples in my written testimony of that.
    It is quite clear when there is a number I think 
responsible companies are disclosing those numbers. I think the 
tricky part is timing and not overwhelming the marketplace with 
data that is really not ultimately of use.
    Chairman Reed. Let me ask the comments of other panelists 
before I turn quickly to Senator Carper, but we will have a 
chance. Ms. Lubber.
    Ms. Lubber. I want to go back to what we are looking for is 
the disclosure of material risk, not any risk, not minor risks, 
not risks that cannot be calculated. But if we are seeing 60 or 
70 percent disclosure voluntary that is not fully complete, 
shows that it can be done. When we see disclosure in the 
mandatory filings, in the 10ks, by DuPont, Johnson, GE, many 
electric utility companies, they are disclosing material risk. 
They are looking at scenarios. They are finding ways to come up 
with realistic numbers. And they are disclosing information. 
They have shown us that it can be done.
    The problem is when you look at two auto companies. Auto 
companies know there will be some change in CAFE standards, if 
not tomorrow, in 4 years, but looming. And given that their 
product lines take 7 or 8 years to get out, the fact of the 
matter is that if the CAFE standards change, fuel economy and 
their products have to change a bit, they need to know now. 
There will be a cost to making those changes.
    Those are the kind of things that can be calculated, that 
shareholders want to know who is best positioned to come out 
with a line of cars that are more fuel-efficient. Those are the 
material risks that can be disclosed. We see one auto company 
doing it in and another writing nothing.
    It tells me it can be done, it is being done, and we will 
all benefit from more consistency in seeing those material 
risks. Not every risk, not wacky calculations, but scenario 
planning which companies--that is what they do. Board members 
are charged with, as fiduciaries, looking at the risk to the 
company. This falls squarely in what boards should do, what 
disclosures should show, and what investors need in the 
marketplace.
    Chairman Reed. Do you have a comment, very briefly?
    Mr. Read. I think there are two focal points to look at. 
One deals with sequence, one deals with standardization.
    Regarding sequence, there will be a requirement--you simply 
have to have standardized carbon disclosure before you have a 
carbon trading system. You could not have a credible carbon 
trading system without standardized disclosure. So there is a 
sequencing which, to the extent that we get into the serious 
talks regarding carbon trading regimes, you have to know what 
you are starting with. You have to know, and the marketplace 
itself has to have a guide for what the relative values will 
be. So in terms of sequencing, the information has to come 
before the trading system.
    The second part is standardization. I think I really agree 
completely with Mr. Smith that different companies in good 
faith can have some different ways of measuring their carbon 
footprints. So what is the role that we are talking about here? 
I think the industry investors, and certainly the Senate and 
the Congress, can come up with some standardized measures, 
methodologies for measuring carbon footprint. So I do not think 
that is really the hurdle.
    But I think that is the opportunity here, to have 
standardization and standardization which can allow for 
eventually a carbon trading system or any other measurement 
system that you might choose to put in place.
    Chairman Reed. Thank you.
    Dr. Yohe, please.
    Mr. Yohe. Thank you. Just briefly, after listening to this 
conversation and learning a lot, I would like to go back to 
first principles about the complexity of the problem and the 
notion that we are not going to solve the problem immediately. 
What we need to do is set up an environment wherein we make it 
clear that carbon is not free and that it will be more 
expensive next year than it is this.
    That suggests to me setting a targeted price for permits 
or, a tax for carbon and arranging for it to grow over time in 
a predictable and persistent manner. The key is that business 
understand what the price is and what it will be.
    Over a period of time within which the results further 
studies of the climate system will be emerging, that price 
should increase at something like the rate of interest. Reports 
of liabilities and material concerns could then be offered from 
a business environment within which uncertainty derived from 
climate policy would be minimized.
    Uncertainty would expand when, from time to time, policy 
adjustments would required in response to global portraits of 
how we are doing against long-term objectives.
    It is in these adjustments that the risks associated with 
all of those thresholds about which I spoke earlier come into 
play. Companies would have to try to anticipate what was going 
to happen to climate policy and how those adjustments were 
going to be made. If the adjustment process were sufficiently 
transparent though, the uncertainties affecting private 
business decisions could be managed.
    I am, here, making a distinction between the social cost of 
carbon (damages created by climate change aggregated across the 
globe and discounted to the present) and the private (policy 
derived) cost of climate policy to business. Is there a macro 
institution that does something like this--make manageable 
adjustments to short-term policy informed by long-term 
objectives? I would suggest maybe the Federal Reserve Board is 
such an institution. The FED has certain long-term targets for 
economic growth that inform its long-term objectives for growth 
in the money supply, but they also make adjustments in the 
short-term varying economic conditions. People who are affected 
by the FED's decisions understand their process. They face 
material risks to changes in monetary policy, but they take 
this into account all of the time. Accounting for short-term 
climate policy would thus be a familiar problem cast in a 
different metric.
    Chairman Reed. Thank you very much, Dr. Yohe.
    Senator Carper, thank you.
    Senator Carper. Thank you, Mr. Chairman. And to our 
witnesses welcome. I just want to make sure I have the correct 
pronunciation of all of your names. Dr. Yohe.
    Mr. Yohe. Yohe.
    Senator Carper. Yohe. Yohe.
    Mr. Smith.
    Mr. Smith. If you miss on me, we have got a lot to talk 
about.
    Senator Carper. Although, in Delaware Y-o-h-e is always 
Yohe, but Yohe.
    Ms. Lubber.
    Ms. Lubber. You have got it.
    Senator Carper. And in Delaware, we would say George Read. 
He was one of our great colonial heroes. Is it Read?
    Mr. Read. Yes, sir.
    Senator Carper. The Reads have it here.
    Maybe just a quick statement and then a couple of questions 
if I may.
    First of all, I thank the Chairman for convening this 
hearing and for letting an interloper come on, somebody who is 
not even on the Subcommittee, come in and not just sit here but 
also even ask questions. I am grateful for that opportunity.
    I think I may be the only member of the Banking Committee 
who serves on the Environment and Public Works Committee where 
I chair, along with the great help of Senator George Voinovich, 
a subcommittee that deals with climate change and nuclear 
safety and security.
    For a long time I felt--I think I can speak for Senator 
Voinovich, we believe that companies need certainty, 
particularly as they address the future, particularly companies 
providing electricity, utilities. And they are trying to figure 
out what the demand is going to be for their product, 
electricity. They are trying to figure out how to provide it. 
They are trying to guess what the regulations are going to be 
with respect to emissions of sulfur dioxide, nitrogen oxide, 
mercury, CO2, and the like.
    What I have heard from any number of utilities is tell us 
what the rules are going to be. Just tell us what the rules are 
going to be. Give us a reasonable amount of time, some 
flexibility and then get out of the way and we will figure out 
how to get this done.
    But they are interested in certainty and I am sure they are 
reflecting the views of not just their boards of directors but 
also the views of a lot of their investors who have a fair 
amount of money at stake in a number of these companies.
    I think climate change regulations are coming. If I were an 
investor, I would want to have some idea of what that will 
entail.
    I think it is tomorrow, there is a Subcommittee on the 
Environment and Public Works Committee, we are going to have a 
markup. You may have already talked about this before I got 
here. The Subcommittee will be chaired by Senators Lieberman 
and Warner, and they are going to attempt to move their climate 
change bill just addressing CO2. They are going to 
try to move it out of Committee to the full Environment and 
Public Works Committee.
    I think the bill contains a provision that requires the SEC 
to promulgate regulations requiring companies to disclose their 
climate change risks. And I have a copy here of the language, 
it is actually pretty brief. Mr. Chairman, with your 
indulgence, I would just like to read it if I may. It is not 
that long. I will read the first portion of it.
    ``Section 9002, Corporate Environmental Disclosures of 
Climate Change Risk.'' That is what this section is entitled. I 
will but just read the first paragraph. It says ``Regulations: 
not later than 2 years after the date of enactment, the 
Securities and Exchange Commission shall promulgate regulations 
in accordance with Section 13 of the Securities Exchange Act of 
1934, directing each issuer of securities under that act to 
inform, based on the current expectations and projections and 
knowledge of the facts of the issuer, securities investors of 
material risk relating to----'' and they mention two things.
    The first of the two things they mention is ``the financial 
exposure of the issuer because of the net global warming 
pollution emissions of the issuer.'' And the second is the 
``potential economic impact of global warming on the interests 
of the issuer.''
    Those are the two things that are mentioned. And then they 
go on to mention some other stuff, uniform format for 
disclosure and some other information. That is really the heart 
of the provision.
    My question, really for all of you, would be to ask you to 
just let Senator Reed and me know what you think of this idea. 
And I will pass this on to the folks at the Committee, the 
other Committee.
    Anyone just jump in, in no particular order. Ms. Lubber.
    Ms. Lubber. We are big fans of the movement on mandatory 
disclosure----
    Senator Carper. Would you start that over again?
    Ms. Lubber. I am sorry. I am Mindy Lubber, and we are big 
fans of mandatory caps on carbon, which the Lieberman-Warner 
bill has. And we are delighted that this kind of disclosure 
provision is embedded in it.
    I could not agree with you more that the business community 
and everybody else likes certainty. They want to know what the 
rules of the game are. We know that there will be carbon 
regulation coming or a major statute. There are 10 different 
versions. I think the business community is owed, as well as 
everybody else, a clear statute that gets passed sooner rather 
than later, given the gravity and the magnitude of the problem. 
And they will figure out how to get in line with compliance.
    When we were all part of the debate around the Clean Air 
Act and the Clean Water Act, there were all sorts of this is 
going to kill the business community, it is too much 
regulation, it costs too much. And once the certainty was 
provided, once the statutes were put in place, there has been 
nothing in history that has seen the kind of change in air 
emissions and in water emissions and the magnitude and the 
speed at which the problems got better.
    That is the speed we have got to be seeing, given the 
magnitude of the problem of global warming. And I think moving 
expeditiously on a statute that puts a cap on carbon and a cost 
on carbon. Right now carbon pollution is free so we keep 
getting more of it. Putting a price on it and a limit on it is 
the certainty that we need to put in place. And we would love 
to see that move expeditiously with this kind of disclosure 
certainty included in it.
    Senator Carper. Thanks very much.
    May I hear from others, please? Dr. Yohe.
    Mr. Yohe. If I understood what you read correctly, and it 
is the first time I have heard it, they are asking for 
disclosure of material risks from climate impacts as opposed to 
material risks from climate policies.
    Senator Carper. I think that is correct.
    Mr. Yohe. I think that we need to go back to what I said 
earlier. The subtext there is that attribution of observed risk 
to climate change is a very difficult task that we cannot 
expect businesses to accomplish. Senator Reed, you asked 
earlier about a specific company. I still do not have a 
specific company, but let me focus on a specific location. 
Consider a company that was located in New Orleans say 3 years 
ago. Of course, Katrina came and the levees broke. Perhaps our 
company was destroyed. Maybe it is back in place now, but maybe 
it is not.
    Now think about what they might have reported about 
material risk from climate change in 2003. It was certain back 
then that a hurricane would strike New Orleans at some point. 
Could our business attribute Katrina, or its intensity, to 
climate change? Probably not. Would they have been required to 
do so if the Lieberman-Warner bill on climate change had been 
in place back then? Attribution is so difficult that I am 
doubtful that requiring them to do so would have been a good 
thing.
    The chance of a severe hurricane was surely a material risk 
that should have been reported. I hope that representatives 
from our business would have attended all of the workshops that 
were held along the Gulf Coast prior to Katrina. Those 
workshops clearly outlined the risks associated with rising sea 
levels and severe coastal storms. Our business may have even 
heard the Army Corps of Engineers describe how vulnerable the 
levees were. But to hold our business responsible for saying 
that these risks were born of climate change is, for me, a 
little bit hard to swallow.
    Senator Carper. Thank you. Mr. Smith.
    Mr. Smith. I have, I guess, two reactions. First of all, 
from a process standpoint, my immediate reaction to the 
provision is that it is useful but not necessary. And that is 
that there are mechanisms that are lesser than a statutory 
mechanism for achieving the same result, and that have actually 
worked sometimes with fine tuning and sometimes with macro 
tuning in other examples to prod the disclosing community along 
to refine their thinking, to say more. I am thinking 
principally of Staff Accounting Bulletin 92, which was issued 
with respect specifically to Superfund litigation and 
remediation liabilities in 1992.
    And then out of the environmental arena, the very useful, 
short and terse work that the staff did with respect to the 
millennium bug, the Y2K bug, which was a pervasive problem. One 
of the requirements there was to compel disclosure, but on a 
Staff Legal Bulletin basis, on the degree of preparedness of a 
company to meet the issue. And if they had not done an 
assessment, that that fact itself was material because you had 
not looked and therefore the investment community needed to 
know that you had not even bothered to look.
    That is my process comment.
    If the Senator will indulge me for a second for a story 
from experience from a substantive standpoint, I think that the 
distinction lies between two companies, one with whom I had 
experience--privatizing a pulp and paper business in another 
country that had a mill--a material mill--situated on a 
peninsula jutting out into a saltwater body and took all of its 
process water from the aquifer underneath the peninsula. And 
took huge volumes of it up. And just as their billion-dollar 
bond issue was about to come to market, started getting salt 
water readings in its fresh water wells, which would have been 
fatal to its paper production.
    The onset of even those negligible readings of saltwater in 
a mill of that importance was something that was an immediate 
and material risk, disclosable, and was disclosed. That is 
useful disclosure. If you are going to buy a piece of those 
bonds, you needed to know that certain parts of the mill might 
not work if saltwater intrusion continued.
    On the other side, I would hate to have legislation that 
compelled disclosure of a catalog of risks that were not 
particular to the actual workings of a particular business. You 
might have a water dependent business in the Midwest in the 
United States that clearly would be adversely affected if 
global warming dried streams on which it relied for discharge 
or for cooling water. But if there were no scientific data 
behind the event, then simply to disclose that we are dependent 
on heavy usage of water is not necessarily useful for the 
marketplace, and the degree of quantifications necessary would 
certainly not assist in the pricing of any investment in that 
particular company.
    Senator Carper. Good, thank you. And thanks for the 
example.
    Mr. Read, my time has expired, but just briefly, if you 
would take a shot at this one.
    Mr. Read. Very briefly, from my vantage point, sufficient 
regulatory authority does exist already by the SEC to compel 
appropriate disclosure. However, although they have that 
ability now, I think it likely will take prodding by your body 
to compel the SEC to put those disclosure standards in place.
    Senator Carper. Thanks so much. Thank you all.
    Thank you, Mr. Chairman.
    Chairman Reed. Senator Casey, if you have questions.
    Senator Casey. Mr. Chairman, thank you very much.
    I have to apologize. I was running out to the floor and 
walking at a fast pace, running on the way back. I wanted to, 
first of all, say that when I was giving my opening, Ms. 
Lubber, you were at that time and still are have a network that 
I referred to and I did not acknowledge it and I am sorry about 
that. I did not realize. I was reading the first part where 
they say president of--is it Ceres? Is that how you pronounce 
it?
    Ms. Lubber. Ceres.
    Senator Casey. Ceres. But I did not read the rest of it. It 
says Director, Investor Network on Climate Risk, which I was 
talking about. I am sorry about that.
    But I guess the general question I have for really everyone 
on the panel, and I know you have spoken to this either in your 
statement or when I was gone so some of it might be redundant. 
But it is good to repeat ourselves on important topics, I 
think.
    Just what you think, if you had an agenda item or an action 
agenda for the U.S. Senate, other than having a hearing like 
this, which I think is a critical component of having a 
strategy, what would you have us do in the next year to advance 
some of the goals that you have outlined today? And maybe I 
will go right to left or left to right, it does not matter to 
me. Mr. Read.
    Mr. Read. I think there have been some points brought up 
today, Dr. Yohe mentioned one of them, which is likely there 
should be a healthy debate on the comparative merits of a 
carbon trading system, for instance, versus a carbon tax. This 
is more than what it might seem, though, at first because there 
are different--they really are different tools. You can get to 
different things.
    For instance, with a carbon tax you potentially could apply 
that not only to U.S. companies but to international companies 
which provide imports to the U.S. You can apply it in different 
ways, I think. You can have a very--for instance, if there is a 
larger carbon footprint from companies in China, you could make 
the appropriate assessments on that potentially with a carbon 
tax in a way that you could not with a carbon trading system.
    There are going to be some very important issues that you 
can get at just by having that debate on the tax versus the 
carbon trading system. So I think it is worth having it. 
Irrespective of where you end up, you are going to be in a 
better place having that argument in good form.
    Of course, the actual impact of--well, when it comes to 
global warming, carbon is not the only issue. There are many 
other forms of greenhouse gases. So we think in terms of 
CO2, but there are lots of other challenges that we 
are going to be facing. For instance, there could be material 
wealth of methane that could be going into the atmosphere over 
the coming years. Methane is a good 30-fold greater impact than 
CO2 on the atmosphere.
    The other part, I think, that I would really wrestle with 
very seriously is that the social goal that we are looking at, 
for instance, when looking at renewable fuels, is looking at 
renewable and clean technologies over conventional and dirtier 
technologies. So what that points to is the need for broad-
based support rather than narrow support. So I think now when I 
look at the nature of what is supported, it is not as much--I 
take a look at some things, unwittingly by having too narrow a 
sense of what our renewable or clean fuels, things can happen 
like for instance using methane as fuel from municipal waste 
does not receive a subsidy. That can get crowded out compared 
to corn-based ethanol. That would not be the intent of the 
Senate right now, to have one clean technology crowd out 
another.
    But I think the imperative for trying to have broad-based 
incentives for renewables will be also an important 
consideration for this body.
    Senator Casey. Thank you very much.
    Ms. Lubber. I am going to answer the question in wave the 
magic wand, you asked that open question and I appreciate it. I 
think, given that magnitude of the problem----
    Senator Casey. We do not have one, by the way.
    Ms. Lubber. If you could find me a magic wand or if I could 
find one, I will bring it to you.
    But given the magnitude of the problem, which is up there 
with the greatest economic, environmental, national security, 
public health threats we face. Given that it is not any time in 
the future but we are now starting to see the impacts now. 
Given that we are certain that the problem is getting worse and 
not better. And given that we know minimally, and I think the 
IPCC Commission is going to tell us that this may even be an 
understatement, that we need to reduce are carbon footprint by 
80 percent by the year 2050 and that we have got to start that 
yesterday.
    These are big issues. My magic one would say if the Senate, 
with your leadership from this Committee and others, should 
move to pass a comprehensive cap and trade or a tax--I look at 
the cap and trade not because I think it is smarter or more 
elegant or even preferable, but more realistic. Literally put a 
price on carbon. This gas that is going into the air is not 
free. It costs us a lot of money. But when things are free you 
get a lot more of it. Right now carbon pollution is free.
    I would put a price on carbon and a limit to the amount 
that can go up into the air, a cap and trade system. With very 
clear limits not only for what we need to get to 2050, but what 
needs to be happen by 2030 and 2020.
    At the same time I would have incentives that will help 
jump-start an industry that is going to also allow us to meet 
the energy needs of this country and beyond. If, in fact, we 
are going to limit the carbon going into the air and limit the 
coal use and limit some other fuels, we have got to make sure 
we are jump-starting the industry that will allow us to keep 
our cost of living and keep moving.
    And I certainly think there is movement to do that but that 
is what I believe will get on top of the problem.
    I want to add just one point, and that is the issue being 
debated at this hearing, I would argue, is more narrow, is more 
doable, is nevertheless quite an important stepping stone and 
does not even require statutory change. The SEC has the 
authority to require the disclosure of material risks. Many 
companies are doing that. Those companies say when they do it, 
when they just assess their risk even before they disclose. 
They end up managing it better. We know that is information 
that ought to be the marketplace. We are seeing it done. It is 
not overly burdensome. We know the standards by which we want 
to measure it.
    I think that is something that could happen now that will 
make a difference in moving us forward and that, with the 
leadership of this Committee and a discussion perhaps with the 
SEC, we can move on this without statutory changes and without 
even regulatory changes. And it will go a long way in helping 
move companies to act to reduce their carbon footprint.
    Mr. Smith. Senator, I have never been very good at magic 
wand questions. I do not even know what my favorite ice cream 
is. So I am going to limit the question to the scope of what I 
came to talk about, which was disclosure.
    I think clearly the most significant thing, from my 
perspective, is to grant the marketplace the clarity of 
information which the Senator was talking about having heard 
about with respect to utilities and their desire for clarity of 
regulation.
    I think this hearing is extremely timely. The Superfund 
examples that I talked about earlier in my testimony and have 
written about in my written testimony were done, unfortunately, 
years after the fact. The fact that this hearing is being held 
today, before any comprehensive Federal legislation, I think 
really is a tremendous window of opportunity for teeing up and 
aligning what the Federal regulatory solution is going to be 
with what it dictates to the marketplace about what to say 
about that regulation is going to be.
    I would encourage this Committee and the Senate as a whole 
to maintain that synchrony to the greatest extent possible, so 
that the markets that are going to drive the solutions once 
there is certainty can also drive out information with clarity 
and under clear guidelines on a going forward basis.
    If we had to do it and waste 5 years and go backwards the 
way we did with Superfund, I think that would be a lost 
opportunity and a terrible mistake.
    Thank you.
    Senator Casey. Doctor. I know we have a vote that, I think, 
just started.
    Mr. Yohe. I will try to be quick. IPCC is not policy 
proscriptive, so we certainly do not say that an 80 percent 
reduction by 2050 is required. My own personal view is we have 
to get to an 80 percent reduction sometime in this century. 
Picking 2050 is a good place to start the discussion, but it 
might be too early or too late.
    I also agree that you should think seriously about taxing 
carbon as it enters the economy. I think that you need to hear 
why cap and trade was a good idea for regulating sulfur dioxide 
emissions and why the economics that made it right for sulfur 
dioxide do not necessarily apply to carbon emissions.
    Fundamentally, though, I think members of the Senate should 
remember that there is another component to the United Nations 
Framework Convention on Climate Change that this country has 
signed. We have, through the Convention, agreed to help the 
least vulnerable people on the planet adapt to and cope with 
the impacts of climate change. The new negotiations for the 
second commitment period of the Kyoto Protocol include 
international discussions about how to create and manage 
adaptation funds. We need to participate fully in those 
discussions I think, as well (and I guess Speaker Pelosi has 
suggested this and has thereby caused a bit of an uproar), that 
representatives of the legislative branch of this Government 
should go to Bali (and subsequent meetings of the Conference of 
the Parties of the Framework Convention) as observers to see 
the negotiations first hand.
    Mitigation and adaptation will both be on the table, and 
you all need to get a full understanding of exactly the way the 
world looks at us, exactly the way the world looks at the 
problem, and exactly the way the world looks at the requirement 
to do both--i.e., to mitigate and to adapt.
    The fact is that we are committed to another half degree to 
one degree Centigrade warming over the next century even if 
greenhouse gas emissions ended tomorrow. Adaptation is an 
imperative. Working on how best to adapt is not giving up on 
the problem. Adaptation is an essential part of a policy 
portfolio that is absolutely required.
    Senator Casey. Thank you and I thank the Chairman for the 
extra time.
    Chairman Reed. Thank you, Senator Casey. And thank you for 
your wonderful testimony. This has been informative and 
insightful and, I think, hopefully prophetic. Mr. Smith's 
comments about the timeliness of the hearing, I concur 
entirely.
    Let me make just brief administrative announcements. Some 
of my colleagues might have additional written statements. They 
will all be made part of the record.
    If there are additional questions for the witnesses or if 
there is additional testimony, that will be accepted no later 
than November 7th. We would ask the witnesses if you do receive 
written questions, please respond within 10 days.
    But thank you very much for your participation today and 
for your great work throughout the year.
    The hearing is adjourned.
    [Whereupon, at 3:53 p.m., the hearing was adjourned.]
    [Prepared statements and additional material supplied for 
the record follow:]
                 PREPARED STATEMENT OF SENATOR MENENDEZ
    I want to thank Chairman Reed and Ranking Member Allard for putting 
together this important hearing.
    If there is anything I hope we can take away from today's 
discussion, it is that climate change does not exist in a bubble. The 
fact that we are having a hearing on this issue in the Banking 
Committee speaks to its very nature. Asking the questions of what we 
can do to affect global climate change is not limited to those who 
advocate for the environment or to improve our energy usage. It is not 
limited to one region of the world, or to certain cities. It is not 
limited to just one sector. The responsibility falls on all of us. And 
we must all be asking the questions of what we can do to affect our 
climate--especially those of us who think we have little or no role.
    Today we have a chance to ask those questions, to look at what 
those in the financial sector are doing, to ask those who perhaps do 
not think about emissions on a daily basis to do more.
    It is imperative that our nation make a transition to a cleaner, 
safer, greener, and wealthier country. We must take action to stabilize 
greenhouse gas emissions and ward off the potentially catastrophic 
effects of global warming. This will not happen by itself, however.
    I am pleased that Senators Lieberman, Warner, and Boxer have shown 
such leadership in the issue of climate change by introducing and 
moving a bill forward. This bill would take a number of important 
steps, including requiring the reporting of climate risks. However, I 
do think we should look closely at how the bill deals with corporate 
reporting of climate risks and greenhouse gas emissions, and believe 
there could be room for improvement.
    First I think it is important to distinguish between two very 
different kinds of reporting.
    On the one hand, we want investors to know whether companies are 
faced with financial risks because of the potential effects of climate 
change. These risks range from increased insurance claims to physical 
risks such as stronger storms or flooding. In general these risks are 
difficult to quantify or even predict, but are nonetheless terribly 
important for those making investment decisions.
    The second kind of risks that should be reported are the risks 
associated with the necessary changes we will all have to make in order 
to reduce global emissions. These risks are also difficult to predict 
and also difficult to put into dollar terms, but I would submit that 
these risks can be quantified.
    What future regulations will entail or what costs they might impose 
cannot be foretold, but if companies simply reported their emissions to 
investors then investors would be empowered to make their own 
calculations on potential exposure or the likelihood of different sets 
of policies being enacted. Without such data investors will be limited 
to what companies choose to disclose and left to trust the company's 
own assessments of financial risk.
    Unfortunately I do not read the Lieberman Warner bill to require 
such disclosures. Instead it gives the SEC broad discretion to 
formulate risk reporting associated with climate change.
    My staff is currently working on some language that I feel must be 
part of any corporate reporting on climate change:
    First, the EPA is the organization with the expertise and 
experience in administering greenhouse gas emissions reporting 
programs. The SEC must work alongside the EPA to design such a program 
here.
    Second, emissions reporting should be done at the corporate level 
and not just at the facility level. And this reporting needs to include 
indirect emissions such as electricity use and not just direct 
emissions. Climate leaders such as Citigroup, Target, and Marriott do 
not have large industrial facilities or power plants that would be 
covered by the Lieberman Warner bill. Yet all three companies are 
voluntarily reporting their emissions to the EPA. They realize that 
they can significantly help reduce our nation's carbon footprint and 
they want to be held accountable for taking this responsibility 
seriously. In turn, investors such as those represented by CERES here 
today want to know what organizations are sensibly planning for the 
future and who is stuck in the mindset of last century.
    Third, emissions must also be reported by country. Different 
nations operate under different regulatory regimes and therefore 
multinational corporations are exposed to different risks.
    I'm afraid I cannot stay for the whole hearing today, but I would 
like to hear from the witnesses on this issue, and I will be submitting 
questions for the record.
    Again, I want to thank Chairman Reed and Ranking Member Allard for 
their work in putting this hearing together. I look forward to working 
with them, this Committee and the EPW committee in putting together 
climate change legislation that will help us transform our economy and 
protect investors at the same time.
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