Climate Change Risk Management

The potential impact of global climate change has generated proposals for new U.S., Canadian and international laws and regulations, and it is likely that North American companies soon will incur costs to reduce their greenhouse gas (GHG) emissions. Weather conditions, rising sea levels and changing snow and rainfall patterns may also affect operations, supply chains and profitability. Corporations may face investor claims for losses blamed on company operations, and directors and officers may face similar claims for failure to adequately anticipate the effects of climate change or greenhouse gas regulation on company prospects.

Property Damage, Business Continuity and Personal Injury

Climate change could exacerbate the physical impact of extreme weather events, alter rain and drought patterns and raise sea levels. These events can cause sudden and material damage to business assets, interrupt business operations directly or disrupt key elements in transportation or support activities. For agriculture, hospitality, energy or similar climate-dependent businesses, changes in climate, sea levels and rain and snowfall patterns can materially impair the value of long-term assets.

Prudent risk management suggests companies should consider ways to anticipate the effect of long-term climate trends.

Third-Party Claims

Lawsuits for damages blamed on climate change could create legal liability for some companies. Plaintiffs have brought lawsuits alleging that a company's GHG emissions contributed to extreme weather events like Hurricane Katrina, which directly or indirectly resulted in property damage or bodily injury. Claimants rely on the common-law nuisance theory that the GHG emissions are a "public nuisance" causing property damage or injury. Companies whose operations emit large amounts of GHG, e.g., fossil-fuel-based energy companies, investor-owned utilities, power generators and large industrial facilities, may be particularly exposed to multiple large claims and may have to bear defense costs, including defense of potential class actions, even against claims that ultimately fail.

Some lower courts have dismissed such cases because plaintiffs lacked "standing" to sue or because their claims raised "political" questions unsuited to judicial resolution. However, the Second Circuit Court of Appeals reversed a lower court's dismissal of one such suit in Connecticut v. American Electric Power, finding it appropriate for district court consideration. It is possible more of these cases will be brought, particularly as long as no comprehensive federal climate change legislation exists.

Canadian courts have not yet been asked to consider similar lawsuits. But some Canadian companies may be exposed to the same litigation risk if such claims become more common, even if only in U.S. courts.

Capital Markets and Securities Risks

Public companies face exposure to legal liability for investor losses blamed on failure to anticipate or disclose climate change risks. Public company directors, officers and risk managers should be aware of such exposures.

On February 2, 2010, the U.S. Securities and Exchange Commission (SEC) issued interpretive guidance for publicly traded companies related to climate change disclosure. See Perkins Coie update on the Interpretative Guidance. The guidance advises publicly traded companies on how they should apply existing disclosure requirements to climate change matters, including regulatory, legislative and business developments related to climate change, as well as physical changes such as weather and availability of resources, any of which could have a direct or indirect material effect on a company's finances and operations.

Similarly, in Canada, public companies are required to disclose material risks, including those involving climate change.

Later this year, the Ontario Securities Commission (OSC) intends to provide further guidance to publicly traded companies on environmental matters and on how to meet this continuous disclosure obligation in reference to environmental issues. It is likely that the OSC environmental disclosure guidance will include guidance in respect of climate change disclosures. The OSC is a provincial regulator. However, due to the relative importance of Ontario in Canadian capital markets, any OSC guidance will likely affect all Canadian public companies in Canada. It is also likely that the SEC's detailed guidelines will influence the OSC, as well as influence what Canadian investors expect public companies to disclose in respect of climate change-related risks.

Each company must assess its own business and the impact of climate change and GHG regulation on it and, given the relatively rapid developments in potential climate change and GHG-related risks, companies should regularly reassess their analysis and risk reporting. What is not material now could become material later.

Finally, shareholders' resolutions for disclosure of management's responses to climate change are becoming more frequent in proxy statements. Ninety-five such resolutions were filed in the 2010 proxy season alone.

Conclusion and Insurance

Senior executives and corporate risk managers must increasingly consider the potential risks from climate change on corporate operations. Businesses have a number of internal tools at their disposal to address such risks, but internal resources may not always be the best solution. Insurance, including typical insurance products, can be an important element in managing these risks.

Kai Alderson of Fasken Martineau practices business law with an emphasis on Energy, Aboriginal, Environmental matters, including climate change and renewable energy law. Stephen Higgs with Perkins Coie, focuses his practice in the area of environmental and natural resource law.

See Also

Interested in information related to this topic? Subscribe to our weekly Value-chain eNewsletter.