In November the New York Attorney General’s Office announced a settlement with Peabody Energy (BTU), the world’s largest coal producing company, after a two-year investigation showing that the company repeatedly misled investors and the public about the risks of climate change to its business.
Internally, it had calculated projections showing dire consequences for its business of regulatory limits on existing power plant emissions and of a carbon tax of $20 per ton. These projections were absent from its communications with shareholders.
The settlement has been highly cited in relation to the more recently initiated investigation by the same office into whether ExxonMobil’s (XOM) securities disclosures mislead investors about the risks climate change poses for its business – oil and gas exploration and production. Again, internal company research and projections seem out of sync with public communications with shareholders. Since November additional investigations have been announced by attorneys general from California, Massachusetts and the Virgin Islands, with the cooperation of many more states and the strong likelihood of more investigations to come.
It is therefore important to consider: What has been the impact of the settlement on Peabody’s most recent securities disclosures compared with pre-settlement disclosures?
Climate-related disclosures in Peabody’s 2015 10-K are comprised of around 4,100 words. Peabody’s 2016 disclosures consist of around 4,900 words.
Yet the difference between pre- and post-settlement amounts to about 800 words of hot air.
The settlement notes in particular that Peabody denied that it was able to predict the impact that GHG emissions laws and regulations would have on its business and requires that the company:
>Not represent in any public communication that it cannot reasonably project or predict the range of impacts that any future laws, regulations, and policies relating to climate change or coal would have on Peabody’s markets, operations, financial condition or cash flow.
Apparently in response, Peabody inserted this passage into its 2016 10-K (and the preceding 10-Q/A referenced in the settlement):
“From time to time, we attempt to analyze the potential impact on the Company of as-yet-unadopted potential laws, regulations and policies. Such analyses require that we make significant assumptions as to the specific provisions of such potential laws, regulations and policies. These analyses sometimes show that certain potential laws, regulations and policies, if implemented in the manner assumed by the analyses, could result in material adverse impacts on our operations, financial condition or cash flow, in view of the significant uncertainty surrounding each of these potential laws, regulations and policies.”
This new and nebulous language concludes:
“We do not believe that such analyses reasonably predict the quantitative impact that future laws, regulations or other policies may have on our results of operations, financial condition or cash flows.”
The settlement also requests a more objective treatment of all the policy scenarios laid out in the International Energy Agency’s (IEA) World Energy Outlook (WEO), where previously Peabody had focused almost exclusively on the Current Policies Scenario – assuming no policy change impacting coal demand.
>Correctly and in good faith describe IEA’s scenarios for global demand for coal in its public communications, including requiring that if Peabody cites demand projections under the IEA’s Current Policy Scenario, the company will also cite the Agency’s two less favourable projections.
In response, Peabody’s 2016 10-K (and the amended 10-Q that preceded it) now provides a description of each of the three policy scenarios articulated in the WEO. This is useful if one doesn’t feel inclined to read the IEA’s original 200-page report. However, Peabody’s post-settlement securities disclosure fails to consider the company’s prospects under anything other than the status quo (or, at least, fails to share these considerations with investors).
Notwithstanding national commitments covering 187 countries pledging GHG cuts broadly in line with the IEA’s New Policies Scenario; the signing of the Paris Agreement in December 2015 by 195 countries committing to a framework for keeping global warming well under 2°C, as reflected in and surpassing the IEA’s 450 scenario; a recent downward revision in coal demand outlook for China, the world’s largest coal market; and numerous examples of local government leadership on climate policy – Peabody’s 2016 10-K reaffirms:
“We believe that the Current Policies Scenario is the most appropriate for our investors to consider because we believe that it has proven to be the scenario that has yielded the most accurate projections of coal usage.”
Peabody’s post-settlement securities disclosures contain no information about management’s strategy for surviving into a low carbon future, or even whether management has a strategy for surviving into a low carbon future. Peabody’s management seem unwilling to let go of a business strategy that assumes a 6°C rise in global temperatures relative to pre-industrial levels based only on the rationale that this scenario has worked for them in the past.
Suffice it to say, shareholders are not convinced.
Jackie Cook is Founder and Curator of the Climate Risk Disclosure Project.