Climate change liability storm clouds brewing

Publicity stunt protests aside, alleged greenhouse gas polluters are being called on to account from a number of quarters, and it could eventually effect their bottom line, says Chapman Tripp partner, BRIGID MCARTHUR.

While it attracted surprisingly little media coverage, Greenpeace’s climate change ‘notice’ to a number of major New Zealand CO2 emitters¹ is now known about by most in the energy industry.

But should it be taken seriously? Yes, at one level. While not much more than a publicity stunt, it should not simply be dismissed. Though the legal effect of Greenpeace’s notice was dubious at best, it likely signals the beginning of a carefully organised campaign against major greenhouse gas emitters and other businesses that operate (or are perceived to operate) in an environmentally irresponsible manner. While successful litigation of the nature suggested by the Greenpeace notice may be at the extreme (and unlikely) end of the “climate risk” scale, there are a number of other risks that should be considered.

Greenpeace defines climate risk as:

•    Operational risk (disruption of company operations)
•    Insurance risk (increased premiums and/or uninsurability)
•    Regulatory risk (regulation of greenhouse gas emissions and ensuing compliance costs)
•    Shareholder risk (shareholder activism and disruption)
•    Litigation risk (costs resulting from ‘climate litigation’)
•    Capital risk (inability to raise capital)
•    Competitive risk (loss of economic opportunity)
•    Reputational risk

Greenpeace’s notice, served by an Australian law firm specialising in class actions, was predicated on the basis that ‘serving notice’ prevents directors from pleading ignorance in any future climate change-related litigation. But it was legally misguided in a New Zealand context.

Greenpeace alleged breach of a duty of care. But no duty of care could possibly be shown to exist. While Greenpeace likened this to tobacco or asbestos litigation, the circumstances are quite different. Moreover, New Zealand is not such a good place in which to bring class suits: our rules do not facilitate them at all. And importantly where is the causation; how would one business be held liable for climate change, a global phenomenon?

Greenpeace alleged breach of directors’ duties. This is just wrong. Not only are a

director’s duties owed to the company (and not the wider public) but, also, a director in discharging his or her duties has to take into account a whole host of matters, not just one factor such as climate change risk. Also, no duty can be enunciated to transcend the life of the company (or its shareholders or directors), and none operates to the exclusion of any other. It is very difficult to see how directors’ duties could be relevant absent failure to consider a substantial potential negative impact on the business (for example, failing to take into account the likely cost of complying with an emissions trading scheme in the board’s assessment of a new investment) – and even then, both the failure and the impact would have to be pretty extreme.

So there is little risk of personal liability. But what about the risks to the company?

The different heads of risk identified by Greenpeace are not all to be dismissed. The potential bottom line effect of an emissions trading scheme, for many businesses, is significant. This itself is an illustration of regulatory risk, insurance risk and competitive risk. In due course, it may also translate into capital risk as the balance sheet effect trickles through. Quite how to allocate the costs associated with emissions trading, whilst remaining competitive, is an issue that businesses are grappling with pending finalisation of Government policy around emissions trading.

Shareholder activism is doubtless overstating it, but to the extent it occurs it will need managing, and with that goes the reputational risk of how this is achieved. More likely, one imagines, is that companies who react negatively will witness shareholder departures.

Operational risk may seem ‘over the top’ as a proposition, but a number of plants and sites appear to be fairly readily accessible – or scaleable (as Genesis Energy found out when protesters scaled a stack at the Huntly Power Station).

Insurance risk will likely reflect plant safety and overall sanctity from business interruption.

Perhaps the most notable thing coming out of the Greenpeace action is that those businesses “served’ can likely expect more to come, from a range of quarters. More and more, greenhouse gas polluters are being called on to account. This is unlikely to mean dealing with aggrieved shareholders (if they don’t like your business, why would they invest?) and it’s very unlikely to involve shareholder claims.

But, at the end of the day, the collection of ‘climate change risks’ all have the potential to translate into dollars off the bottom line. That, if nothing else, should suffice to cause the issues to be carefully managed. 

• Brigid McArthur works in Chapman Tripp’s corporate and commercial area, with an emphasis on energy law, major contract negotiations, business acquisitions and reorganisations, corporate restructuring, company and securities law and corporate governance. McArthur’s practice now focuses more on energy sector and large industrial concerns. She is an independent member of the Audit Committee of the Office of the Auditor-General, a member of the Institute of Directors and has just completed two terms as Chair of the Energy Law Association.

^{1. Air New Zealand, Carter Holt Harvey, Contact Energy, Fonterra, Fulton Hogan, Genesis Energy, Greymouth Petroleum, Holcim, Landcorp, Mighty River Power, New Zealand Aluminium Smelters, New Zealand Oil and Gas, New Zealand Refining Company, New Zealand Steel, Norske Skog Tasman, Pan Pacific Forest Products, Shell New Zealand, Solid Energy, Todd Energy and Vector.}