The enactment and enforcement of environmental regulations often poses a potential risk to the operation and profits of coal companies. The Clean Air Act and Clean Water Act have long limited the amount of pollution coal-fired power plants can emit, and the Obama administration tightened the limits in 2015, compelling operators to invest in carbon-capture equipment (these limits were repealed in 2019). Increased regulation has caused several utilities to close coal-powered electricity plants in favor of “cleaner” energy sources like natural gas and has also made it harder for utilities to find financing to build new coal plants.
To ensure companies disclose information necessary for investors to make informed decisions, the Securities and Exchange Acts of 1933 and 1934 requires companies that publicly offer securities to make annual and periodic reports. These reports must include disclosures about the impacts of the costs of compliance with environmental laws on capital expenditures and earnings. In recent years, prosecutors have used these securities laws to score major victories against fossil fuel companies that underreport the potential impacts of environmental regulations.
However, without inside information, it can be difficult to determine whether companies are accurately disclosing risks when they identify them. To encourage those with inside information to step forward, the Dodd-Frank SEC Whistleblower program allows whistleblowers, including non-U.S. citizens, to confidentially report companies who are failing to disclose known risks, and whistleblowers who provide original information that leads to successful SEC prosecution can receive between 10% and 30% of monetary sanctions.
As regulatory pressure on the coal industry grows, ensuring that companies are accurately disclosing known risks will be increasingly important. A previous case centered around Peabody Energy Corp. shows how companies could be tempted to commit fraud by failing to disclose financial risks posed by environmental regulation.
Investigation of Peabody Energy Corp.
In 2013, the New York Attorney General’s office launched a first-of-its-kind investigation into whether Peabody Energy Corp., the largest publicly traded coal company in the world, had sufficiently disclosed the risk to shareholders posed by environmental regulations.
The resulting report, released in 2015, found that while Peabody claimed in several years’ worth of annual reports to the SEC that it was impossible to assess potential environmental regulations’ impact on operations or finances, the company had in fact commissioned market studies that found significant impacts to Peabody’s bottom line.
Specifically, Peabody hired an outside consulting firm in 2014 that found a $20 per ton carbon tax would reduce demand for coal as an electrical fuel source by 38 to 53 percent. Peabody also calculated in 2013 that certain regulatory outcomes would reduce the dollar value of coal by 38 percent from one plant and 33 percent from another by 2025.
Investigators also found that Peabody misrepresented International Energy Agency findings about future demand for coal worldwide, citing the most optimistic figures rather than the most likely ones. The report found that these misrepresentations violated both the Martin Act and Executive Law, which prohibit false and misleading conduct in connection with securities transactions.
As part of the agreement it entered with the Attorney General’s office, Peabody agreed to file revised versions of prior disclosures with the SEC stating “concerns about the environmental impact of coal combustion…could significantly affect demands for our products or our securities,” according to a New York Attorney General press release.
The company also agreed not to feign inability to project the impact of laws or regulations on its finances and to include projections for all IEA scenarios in future filings.
The Peabody investigation demonstrates the potential for coal companies to commit fraud by failing to disclose the financial risk of environmental regulations to shareholders – fraud which falls under federal securities laws as well as state.
As the entire coal industry faces increasing financial and regulatory pressure, more companies could be tempted to hide these financial risks. As in the case of Peabody Energy, some companies may see fraud as a solution – but whistleblowers could be key to proving them wrong. The powerful SEC whistleblower program offers a means for company insiders with information on these types of hidden risks to come forward confidentially.