Directors face pressure to be eco friendly

The issue of climate change has certainly become a hot topic. It is now generally accepted that the global climate is changing due to man made greenhouse gas emissions.

The February 2007 report of the Intergovernmental Panel on Climate Change (IPCC) has recently reinforced the already overwhelming evidence for this link.

The international response to climate change, which to date has largely consisted of words, is now being backed by action. In the EU, for instance, a carbon emissions trading scheme is already established.

In the UK, a Climate Change Bill, setting out a framework for legislation that will tackle emissions of greenhouse gases, is currently the subject of a public consultation. Progress is slow, but as things currently stand, a coordinated international response to climate change can only be a matter of time.

Climate change is not just an issue for governments. Companies are also in the front line, and they must get to grips with climate change and its business implications.

There are going to be significant opportunities for companies arising out of climate change in the coming years. For example, energy efficiency and renewable energy production are seen as strong growth areas and are already attracting significant investment.

Significant risks

Climate change also presents significant risks to companies. There is 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 also 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 that have failed to manage climate change risks could affect a company’s results, as could the poor performance of investments affected by climate change.

Actions against carbon intensive businesses by those who have suffered climate change related damage could also be possible in the future.

These will be difficult to prove, but this has not stopped the first such actions from being brought in the US.

Environmental pressure groups have traditionally been the enemies of companies in respect of environmental performance.

However, in relation to climate change, company investors are also applying the pressure.

This is hardly surprising, given the financial impact that could result if a company fails to take the opportunities or manage the risks presented by climate change.

Decision-making process

Boards of directors therefore need to be taking steps to ensure that climate change opportunities and, in particular, risks are properly factored into their decision-making process.

Any failure in this regard could result in legal action against the directors responsible.

Two important aspects of the Companies Act 2006 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” (among other matters) to six specific factors including “the impact of the company’s operations on the community and the environment”.

This 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 in the future.

• 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 built into the legislation, the

likelihood is that environmental pressure groups and others will seek to test the boundaries of the new statutory claim.

Environmental reporting has become very popular in recent years and the trend is likely to continue, especially with the Act now requiring companies to produce an expanded “business review”.

Directors may be tempted to start reporting positive news in order to send the right signals to investors, lobbying groups, government and others that climate change impacts and exposures are being addressed by their company.

However, 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 fiduciary duty mentioned above and/or against what they previously said in their reports to shareholders.

Robust internal verification procedures that back up information published about a company’s activities are vital.

The responsibility therefore on directors to evaluate what climate change means for their companies is plain to see.

Directors are exposed to litigation if losses result from their failure to recognise the risks and opportunities presented by climate change and/or report appropriately.

To minimise the possibility of liability, directors’ and officers’ (D&O) insurers will no doubt be keen to promote appropriate behaviour amongst their insureds in relation to climate change.

D&O insurers (along with liability insurers generally) will also be evaluating the possible effect on coverage of the US Supreme Court ruling in Massachusetts v Environmental Protection Agency (2007).

In this case, it was held 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 emissions of greenhouse gases from motor vehicle exhausts.

Although defence costs are often covered, D&O liability policies routinely exclude liabilities caused by pollution.

If greenhouse gas is now considered to be a pollutant, questions may arise as to the coverage of climate change-related D&O liabilities. IT

Aidan Thomson is head of environment and Francis Kean is head of D&O at Barlow Lyde & Gilbert.