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The temperature is rising for companies with factories that emit so-called greenhouse gases. That’s because governments around the world are considering a range of proposals to address global warming. But even before new regulations come to pass, some investors have found a sophisticated way to put the heat on U.S. companies, particularly those in the energy sector. Shareholder activists are asking businesses to disclose now what risks they could face in the future if limits are placed on greenhouse gas emission. The problems could be considerable: plant renovation and closure costs, government fines, shareholder suits, and decreased insurance coverage. Though the shareholder proposals are nonbinding, they’ve picked up a surprising amount of support, especially from large institutional investors. As a result, a growing number of companies have agreed to disclose their emissions risk. During a two-week period in late April and early May, Reliant Energy, Inc., Southern Company, TXU Corp., Devon Energy Corp., ChevronTexaco Corp., and Valero Energy Corp. all announced that they would adopt some form of emissions risk reporting. New disclosure obligations will mean more work for in-house lawyers at these companies, according to Douglas Smith. A former general counsel of the Federal Energy Regulatory Commission, Smith is now a utilities and environmental partner at Van Ness Feldman in Washington, D.C. “Since what the shareholders are asking for is opinions about law, [in-house] lawyers are going to have a crucial role in assessing the regulatory landscape,” Smith explains. Marc Manly, the chief legal officer at Cinergy Corp., already has his staff working on the issue. In February, Cinergy, a Cincinnati-based utility, became one of the first companies in the country to accede to a shareholder request that it disclose its emissions risk. Manly has assigned two of his lawyers to work full-time with environmental experts to review potential liability. A third Cinergy lawyer is working part-time with the company’s investor relations department to ensure the accuracy of its disclosures, Manly says. When some Cinergy shareholders first proposed that the company report its emissions risk, Manly was less than enthusiastic. He felt that any information the utility provided would only be speculative, he says. Plus, like every other public company in America, his department was already working to meet the new and onerous reporting demands of the Sarbanes-Oxley Act. But now Manly says he’s convinced that Cinergy is doing the right thing. Referring to the classic fable of the princess and the pea, Manly says: “We could have tried to hide the pea. Instead, we’ve decided to be a progressive company and give our shareholders info and detail about how [future potential regulations] will affect us.” The shareholder resolutions are part of an informal campaign led by the Boston-based Coalition for Environmentally Responsible Economies. A self-described “socially responsible” alliance of institutitional investors, CERES has been pushing Fortune 500 companies to adopt progressive environmental actions since the mid-1990s. In recent years the group’s members have moved beyond direct calls for emissions reductions, opting instead for “risk management” shareholder proposals at the companies in which they invest. Suzanne Fallender says that many large institutional investors have decided to back these proposals because they’re smartly worded and speak to a company’s fiduciary responsibilities. Fallender is managing director at Institutional Shareholder Services, an influential proxy research organization based in Rockville, Maryland, that has endorsed several emissions risk measures. By invoking words like “disclosure” and “risk,” she says, activists “have hit upon a sophisticated method to win mainstream investor support.” Shareholders have filed emissions risk proposals at a total of 37 companies since the first measures appeared during the 2003 proxy season, according to the Investor Responsibility Research Center. An independent Washington, D.C.-based research firm, IRRC reports that these proposals have gone to a vote at 16 companies, and been adopted at nine. The resolution at Cinergy � typical of measures filed elsewhere � asked the utility to disclose any “economic risks associated with [its] past, present, and future emissions” of various greenhouse gases. According to in-house lawyers and shareholder activists, companies could face a triple whammy of problems related to these emissions: more regulations, more litigation, and possibly decreased insurance coverage. Lawmakers on Capitol Hill are currently debating several proposals, including the Bush administration’s Clear Skies Act that aims to reduce greenhouse gas emissions by some 70 percent by 2018. The European Union has already passed its own emission curbs and will start fining noncompliant companies in 2005. And though the U.S. opted out of the Kyoto Protocol on Climate Change, it will still become international law if Russia votes to ratify the treaty as expected. As a result of the new regulations, businesses might see an increase in litigation. The initial barrage could come from environmental activists. But a company might also face a second wave of shareholder suits alleging that it didn’t fully disclose its risks. Despite the range of potential problems, some companies have resisted the push for emissions risk disclosure. After shareholders filed an emissions risk proposal at Xcel Energy Inc. during the 2003 proxy season, the Minneapolis-based utility went to the Securities and Exchange Commission. Xcel sought and received a “no-action letter,” which allowed it to keep the shareholder measure off the proxy ballot without threat of penalty. Since then, the company has refused to budge. “The problem we had with this proposal was that it would be forcing us into pretty rigid reporting requirements [that would be] burdensome and costly,” says Xcel assistant general counsel Frank Prager. But other businesses have decided to act. After shareholders filed an emissions risk proposal this spring at Reliant, top management at the Houston-based utility agreed to go forward with disclosure. According to Reliant GC Michael Jines, the chief legal duty for his staff will be deciding how much to publish. His concern is that if the company gives out too much information, investors won’t be able to tell which risks they really need to worry about. Cinergy didn’t immediately acquiesce to its shareholders’ request for emissions risk disclosure. The proposal was first made in January 2003 by Mission Responsibility Through Investment (MRTI), the Louisville-based investment fund of the Presbyterian Church (USA), which holds some 146,000 shares of Cinergy stock. GC Manly says he didn’t even consider putting the proposal to a shareholder vote; he wanted to know what the SEC had to say about it first. The agency gave Cinergy a no-action letter last year, and Manly advised the company’s CFO and board of directors against putting the issue to a vote. They agreed. Nevertheless, Cinergy maintained a dialogue with MRTI, which was starting to gain support from several large institutional investors in the company. Last December, Cinergy senior officers met with representatives from MRTI. The meeting was cooperative, Manly says: “We didn’t wave our no-action letter in their faces.” Ultimately, Cinergy agreed to disclose certain risk positions. Manly is quick to qualify the risk assessment that his lawyers are working on: “We’re dealing in speculation.” The goal, he says, is “forward-looking statements that warn investors and plaintiffs lawyers alike that when we project that something will cost x in ten years, and it costs 2x, that no one is shocked. We don’t want to see lawsuits that say, ‘You fooled us.’ “

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