Gentle Persuasion: The Upside Of CO2 Cuts

While a conservative presidential administration eschews mandatory CO2 cuts, manufacturers move ahead with reductions in response to customer and shareholder relations and liability concerns.

The Bush administration's position on regulating carbon dioxide (CO2) emissions is crystal clear: hands off. In evidence is the United States' refusal to ratify the Kyoto Protocol, which would have imposed mandatory reductions of the nation's CO2 emissions. Coupled with that is recent passage of a national energy bill that contained no caps on what has been identified as the greenhouse gas most responsible for global warming, an admittedly controversial subject.

Yet many manufacturers that operate in the United States are voluntarily reducing their CO2 emissions. They point to a wealth of good business and environmental stewardship as reasons to do so, even absent federal regulation.

But there also exists a wealth of risk for businesses that ignore or dismiss the need to manage their CO2 emissions -- risks of angering their shareholders, losing customers, as well as the specter of liability.

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Indeed, lawsuits aimed at forcing reductions of CO 2 emissions in the United States already exist. In July 2004, eight states and New York City sued five power companies they called "the five largest global warming polluters in the United States." The suit didn't seek monetary damages. Instead, it called on companies to reduce CO 2 emissions. That suit was dismissed last September in a federal court, with the judge saying that setting environmental policies was a role suited for branches of government other than the judiciary. More recently, a group representing the native people of the Arctic filed a human rights complaint against the United States with the Inter-American Commission on Human Rights. Like the lawsuit, this complaint aims to compel mandatory reductions of greenhouse gas emissions.

These lawsuits ride the rising profile of climate change and share the stage with growing shareholder interest in companies' environmental policies and liabilities. That hasn't gone unnoticed by the insurance industry, the ultimate bearers of risk.

Zurich, Switzerland-based reinsurer Swiss Re, for example, is wary that shareholder action related to companies' carbon-management decisions could raise the risk exposure for firms, such as Swiss Re, that provide directors and officers (D&O) insurance.

There's been a whole movement in the last few years on the issue of disclosure of information in relation to environmental issues," says Swiss Re's Chris Walker, managing director of sustainability business development. "There's been a big push by shareholders of these companies to get the companies to declare what their liability is, what they are doing in relation to future emissions constraints or potential liability issues, and whether any of these are material for the business." He points, for example, to the Carbon Disclosure Project, an institutional investor coalition with reported assets of $31 trillion under management. In 2006 the group is asking 1,800 of the world's largest companies to provide investor-relevant information regarding their greenhouse gas emissions. And at least 30 shareholder issues related to greenhouse gas emissions confronted companies last year, according to Lisa Grice, vice president of greenhouse gas management services, for Denver-based CH2M Hill.

If these activist shareholders see that a company is facing a liability as a result of its decisions regarding climate change, "this is going to be a motivating constituency to bring shareholder actions against the directors and officers," Walker says. "Then they would turn to their insurers and say at the very least, you are responsible for the defense costs of these things."

It's a definite concern, says Walker. While the firm has no immediate plans to write exclusions related to climate change into its D&O policies, it is asking questions about the climate policies of companies either applying for or renewing such policies.

"Most chief risk officers of companies haven't really thought this through, particularly in the U.S. And so it's a little bit of a warning shot across the bow to say, 'This is something we're concerned about,'" Walker says. "It's very similar to how the insurance industry handled the Y2K problem. About five years before the year 2000, they started asking questions of companies [and] it was a very clear warning to companies that if you're not managing this problem, we will exclude at some point in time coverage for Y2K-related issues. Ultimately that came about."

Walker believes exclusions related to climate change issues will follow the same path, eventually. "At some point, when there is a regulatory regime in the U.S. for instance, there probably will be exclusions in D&O policies. What we believe is part of our job, though, is to educate our clients that this is a concern of ours, and so we're taking conservative steps at this point."

While he does expect to see lawsuits from "aggrieved" shareholders, the Swiss Re managing director gives less credence to what he terms "climate justice" lawsuits, or lawsuits that charge a company's emissions caused climate change that led to damages. "I think those climate justice suits, to be frank, are very, very difficult. There's too much of a gap between what a company is emitting to the actual damage that is done to show that causal connection," Walker says. "But they're theories, just like tobacco. People tried a lot of legal theories of tobacco before those lawsuits broke through."

Attorneys from the law firm Foley & Lardner LLP say they don't see potential litigation as a primary driver for companies' voluntary efforts to reduce CO2 emissions. American Petroleum Institute research manager Russell Jones agrees. "I think the real concern driving corporations is that they maintain profitability and that they do so in a way that is supportive of the environmental concerns of the citizens," he says.

On the other hand, says Foley & Lardner attorney Mark Thimke, "I do see a lot of continued pressure on the political, shareholder and business level."

Not to be overlooked are pressures from the supply chain, says CH2M Hill's Grice. Some companies, she says, citing Wal-Mart and United Technologies Corp. (UTC) as examples, are asking potential suppliers to provide information relevant to their environmental performance. UTC factors environmental issues into its strategic sourcing process.

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