On November 8, Peabody Energy Corporation, the world’s largest publicly-traded coal company, reached a settlement with the New York Attorney General’s Office (“NYAG”) in which it agreed to revise its financial disclosures to reflect the potential impact of climate change regulations on its future business and cash flow.
The settlement followed a two-year investigation by the NYAG concerning Peabody’s failure to disclose financial risks associated with climate change policies in filings to the Securities and Exchange Commission (“SEC”). The NYAG found that Peabody had repeatedly denied its ability to reasonably predict the potential impacts of climate change policies and on future operations, financial conditions, and cash flows. At the same time, Peabody had made market projections about the impact of future climate change policies, some of which concluded that regulatory actions could have a severe negative impact on Peabody’s future financial condition. For example, in March 2013, Peabody predicted that the “aggressive” regulation of greenhouse gases (GHGs) from existing coal power plants in the U.S. would reduce the dollar value of sales of Southern Powder River Basin coal by 38% and Illinois Basin coal by 33% by 2025.
The NYAG also found that Peabody misrepresented the findings and projections of the International Energy Agency (“IEA”) by describing the IEA’s highest projections for global coal demand and omitting any discussion of the IEA’s less favorable coal demand projections (including the IEA’s central scenario, the New Policies Scenario). The NYAG noted that Peabody’s representations regarding the IEA were not limited to SEC filings, but were also widespread in other communications to the investment community and general public.
Based on these and other findings, the NYAG concluded that Peabody was aware of potential regulatory scenarios that could materially and adversely impact the company’s future business and financial condition, and that it had violated the Martin Act by denying its ability to reasonably predict the future impact of climate change regulation on its business. The Martin Act is a unique New York law which gives the NYAG broad authority to regulate, investigate and take enforcement action against securities fraud. The Act is one of the most powerful tools available to any government entity in the United States to investigate corporations before actually filing suit. Nina Hart, a former law student at Columbia, wrote an in-depth examination of the Martin Act and other securities law tools for the Sabin Center in February 2014.
Under the settlement, Peabody agreed to add specific language on climate policy risks in its next quarterly report (to be filed with the SEC today), including language affirming that the EPA’s Clean Power Plan “could have a material adverse effect on our results of operations, financial condition and cash flows in future periods.” More generally, Peabody will recognize that the regulation of coal-fired power plants and other measures to control GHG emissions could “significantly affect” demand for the company’s products and securities. Peabody has also agreed to refrain from any future representations that the company cannot reasonably predict the impact of climate policies on its future business, and to more accurately describe IEA’s projections for coal demand in future SEC filings and public communications.
The settlement will hopefully encourage action on the part of companies and shareholders to ensure that financial risks of this kind are accurately considered in financial disclosures and public communications. Notably, the settlement came several days after the NYAG launched a separate investigation to determine whether Exxon Mobil lied to the public about the dangers of climate change. The Exxon Mobil investigation provides another example of how the NYAG can use the Martin Act to investigate and prosecute cases of misrepresentation to investors and, if established, financial fraud.