Climate Risks That Every Executive Should Know About

This article originally appeared in GreenBiz. It has been republished here with their permission.

We often think that climate change is something for the government to worry about -- the news is packed full of debate around government response to global warming, whether it’s the climate bill, or how China is outpacing us yet again in carbon markets.

But there’s a more immediate risk to companies in the U.S., something that is much closer to home and independent of whatever the public sentiment happens to be on climate change. For the first time in history, executives and their companies are being held liable for activities that contribute to global warming. It’s not a debate, it’s already happening.
It all started with the SEC Disclosure Requirements in early 2010. Under these new requirements, companies must weigh the impact of climate change when reporting risks to their investors. For the first time, companies need to track, analyze, and report such things as energy use and efficiency, GHG emissions, and other aspects of their business that have until now been a purely political exercise.

Not surprisingly, this has far-reaching implications, but an interesting development is the changing nature of executive liability, and who is ultimately responsible for a company’s actions re global warming.
Directors and officers (D&O) insurance protects companies from the actions of its directors and officers. Without it, entire corporations would be at risk from the actions of it’s executives. It’s a key part of the corporate structure, and has now entered a gray area due to climate change.

Several cases have already been brought about to the Supreme Court as groups target executives and their corporations for their activities that contribute to global warming. What’s interesting is that there is a new  issue emerging that is still playing out -- when it comes to a company’s impact on climate change, does D&O insurance cover executives? While companies say yes, the insurance industry is saying no. We’re talking millions -- perhaps billions -- in legal liability here, so someone will end up holding the bag. Hot potato.
At the center of this debate is a common inclusion in D&O that excludes “pollution” from coverage. The question is: “Do greenhouse gases constitute pollution”? If they do, then executives are not covered by corporate insurance and the company may exposed to the risk of litigation. The EPA issues a recent ruling that GHG is a pollutant, and this sets a precedent that could adversely impact corporations on the wrong side of this debate.
For corporate officers it’s all about protecting the the company and shareholder value, which includes avoiding the risk of litigation at all costs. It appears that -- even without any climate legislation in place -- the question of executive liability is forcing the issue of climate change in the American corporation today.