Climate Change: Directors Take Note...

Originally published in BLG's Directors' and Officers' Liability Review, Summer 2007

It is now accepted that the global climate is changing and that man-made carbon emissions are the cause. The February 2007 report of the Intergovernmental Panel on Climate Change has recently reinforced the already overwhelming evidence for this link.

With one or two exceptions, governments around the world are taking the climate change challenge seriously. In the UK, for instance, a Climate Change Bill has just been produced for public consultation. It sets out a framework for legislation that will tackle emissions of greenhouse gases.

The risks and opportunities

There are going to be significant opportunities for companies and individuals arising out of climate change in the coming years. Energy efficiency and renewable energy production are likely to be strong growth areas.

Equally, there will be significant risks:

• The heightened risk of adverse weather events - a key feature of climate change - could leave certain geographical areas or business sectors exposed to severe disruption;

• The increasing worldwide regulation of carbon in response to climate change could impose increasing financial burdens on industries with large carbon footprints;

• Customers and investors could decide to shun carbon intensive businesses and/or businesses that are not "doing their bit" to address their carbon footprint;

• Poor performance of suppliers or customers who have failed to manage climate change risks could have an impact on a company's results, as could the poor performance of investments affected by climate change; and

• Actions against carbon intensive businesses by those who have suffered climate change-related damage could be brought. These will be difficult to prove, but this has not stopped the first such actions from being started in the US.

D&O liability

Traditionally, it has been environmental pressure groups which have targeted companies over their environmental performance. However, in relation to climate change, it is investors who are increasingly scrutinising corporate activity. Boards of directors need to be taking steps to ensure that climate change opportunities and, in particular, risks are properly factored into their decision-making processes. Directors need to remember that any failure in this regard could result in legal action.

Two important aspects of the Companies Act 2006 (the "Act") could increase directors' exposure to litigation of this type:

• The Act provides that, in carrying out a director's duty to promote the success of the company, he/she must "have regard (amongst other matters) to" six specific factors including: "the impact of the company's operations on the community and the environment". The change highlights the importance of environmental matters in decision making, and directors could be open to criticism if they fail to consider environmental issues like climate change when they make key decisions.

• The Act creates a new statutory derivative action against directors for breach of their duties including the duty to have regard to the environment. Although there are protections against abuse built into the legislation, the likelihood is that environmental pressure groups and others will seek to test the boundaries of the new statutory claim.

The dangers of reporting

To send the right signals to investors, lobbying groups, government and others that their companies' climate change impacts and exposures are being addressed, directors may be tempted to start reporting "good news". Indeed, environmental reporting in recent years has become very popular and the trend is likely to continue, especially with the Act which now requires companies to produce an expanded "business review"¹.

However, whenever companies publish information about their activities, there is a need for them to have robust internal verification procedures. "Talking the talk" without "walking the walk" is dangerous and could lead to legal proceedings focused on how directors' decisions measure up, either against the requirements of the newly formulated statutory duty mentioned above and/or against what they previously said in their reports to shareholders².

Does climate change = pollution?

Insurers will have no doubt noted with interest the debate over the classification of greenhouse gases. Perhaps of most interest is the US Supreme Court ruling in Massachusetts v Environmental Protection Agency dated 2 April 2007 where it was held that that greenhouse gases fell within the Clean Air Act's definition of "air pollutant", thus giving the US Environmental Protection Agency the authority to regulate tailpipe emissions of greenhouse gases from motor vehicles.

Conclusion

In the light of current knowledge, companies need to evaluate how climate change affects them and act accordingly. The responsibility on directors in this regard is plain to see. Directors are exposed to litigation if loss results from their failure to recognise the risks and opportunities presented by climate change and/or report appropriately. D&O insurers will no doubt be keen to promote appropriate behaviour amongst their insureds in relation to climate change in order to minimise the possibility of liability.

Insurers will wish to give very careful consideration to coverage aspects of climate change related claims against directors. Although defence costs are often covered, D&O liability policies routinely exclude liabilities caused by pollution. More fundamentally, how reliable is the definition of pollution itself in most policy wordings, if a greenhouse gas is itself now classed as a pollutant?