The ground is shifting fast under the C-suites of the world. Twenty years ago, climate change was a fringe issue in politics and business — until fires, floods and hurricanes forced government leaders to start seeing a warming climate as a threat to their own careers.
Between 2009 and 2013, about 100 new climate change laws were implemented around the world yearly; 164 countries passed 1,200 climate laws between the ratification of the Kyoto protocol in 1997 and the spring of 2018. In the U.S., the action started spilling over into courtrooms with Ramirez v. ExxonMobil — a class-action lawsuit filed in 2016 by purchasers of the oil major's common stock alleging the company fudged its forecasts to conceal from investors the degree to which climate change would cut into future profits.
Those in corporate and environmental law see Ramirez v. ExxonMobil as merely a starting gun. As evidence mounts that climate change will affect almost every corporate sector — not just oil companies — we can expect to see more and more investors demanding complete transparency from corporations about the value of stranded assets, the cost of regulation, and the threat of further lawsuits. And if they don't get it, they might start looking for someone to punish.
"Most of the time, case law like this starts in the U.S. before crossing over to us," says Sheel Chaudhuri, an insurance law practitioner at Clyde & Co. in Montreal. "What we're seeing in the U.S. now is experimentation — plaintiffs throwing a lot of arguments out there to see what sticks."
Could the trend start targeting individual corporate directors and officers personally? It hasn't happened yet, but in Canada, the case law — on D&O's fiduciary obligation to consider the effects of their decisions on a wide range of stakeholders, and on the disclosure responsibilities of corporations' — is robust.
In both Peoples Department Stores Inc. v. Wise and BCE Inc v. 1976 Debentureholders, the Supreme Court of Canada held that corporations' duty to shareholders goes beyond the quest for short-term profit. And that directors' duties go beyond even the narrow interests of shareholders. In BCE, the court held that "the fiduciary duty of the directors to the corporation is a broad, contextual concept … not confined to short-term profit or share value …" and could invoke the interests of "shareholders, employees, creditors, consumers, governments and the environment …"
"Directors and officers sign the corporation's financial statements and disclosures," says Cynthia Williams, a professor of securities and corporate law at Osgoode Hall Law School. "If the financial statements are faulty, and if they are not made in good faith, the people who sign those statements can be found personally liable."
"As long as a corporation has a robust governance process to evaluate the risks and opportunities of climate change, the risk of personal liability for the directors and officers is pretty low at this point," she adds. "But disclosure about that governance process is the best way for corporations and their directors and officers to protect themselves — both from liability and from investors' concerns that non-disclosure means the company isn't doing what it should be doing to evaluate climate change risks and opportunities."
Climate change affects business performance
Climate change can make inputs costlier to source, while new government regulations can force changes to old business models. Companies with direct links to the energy industry could face massive class-action lawsuits driven by non-shareholders, like the claims that ended with a $15 billion order against two tobacco majors in 2015. Corporations are expected to manage all of those risks in their shareholders' long-term interests.
"None of these risks facing corporations preclude personal risks for directors and officers," says Chaudhuri. "As plaintiffs become more confident, directors and officers themselves will start being targeted.
"It's inevitable, and I think it's necessary, too. Many companies need to change the way they do things, and directors and officers, in particular, have great power to effect change in the economy."
Insurance companies expected to speak up
One wild card facing corporations is the role of insurers. D&O liability is a lucrative field for insurance companies, said Chaudhuri — but the idea of linking that liability to climate change is a recent one, and insurers are still "playing catch-up."
"When new risks emerge, insurers work to determine how much of that risk they're willing to absorb," he says. "More responsible directors and officers are less likely to be targeted for court action. That's where insurance premiums can have an effect."
"Intentional acts and misrepresentations can be excluded from claims," Chaudhuri adds. "A director or officer who hid or misrepresented information is harder to cover."
In 2018, the Insurance Bureau of Canada estimated insured losses from catastrophic weather events at $1.4 billion for that year alone. "For every billion they pay, there's another $3 billion in costs to the public sector," says environmental lawyer Dianne Saxe, who runs a boutique firm that advises companies on their climate strategies. She predicts a major emitter will someday be hit with heavy weather-related asset damage — and will be refused payment by its insurer because it contributed to the cause.
"Does anyone think insurance companies like writing massive cheques?" she asks. "The more the fossil fuel industry loses its moral licence with the public, the more likely such things become."
Investor pressure emerging
And as tobacco companies learned to their sorrow, losing that "moral licence" exerts pressure in other ways — by convincing investors to take their money elsewhere, or to demand something more than simple profit in return. Last month, the biggest asset management firm on the planet, BlackRock, issued a letter to CEOs calling on them to establish emissions reduction targets and to bring up their game on risk disclosure. It warned them that it could use its substantial voting powers to see to it they follow through.
"BlackRock has indicated that it might vote against individual directors for board re-election," says Williams. "That likely wouldn't be more than an embarrassment, but still quite a personal embarrassment for the directors BlackRock votes against."
Carol Hansell, a senior partner at Hansell LLP, compares the reaction of corporate boards now to climate liability to where most of them were a decade ago on cybersecurity and the threat of online attacks.
"It's not that boards don't care about climate change. It's just not something that's been routinely elevated to the board level," she says. "Corporate boards have started calling for more information and analysis lately.
"If you're in the food industry, climate change affects supply. If you make steel, it affects transport. It doesn't matter what you do — climate change poses threats to your business model. And no one can claim any more to be unaware of that threat."
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