It is as inevitable as the dropping of the other shoe, and it should not take anyone by surprise. The “other shoe” is the legal fall-out from climate change. While climate change is a new and expanding field of knowledge (although some may still deny its existence), the laws defining related issues of responsibility, obligations and legal duties are inevitably a step or two behind – the lag being typical whenever society comes to grips with new knowledge. The challenge for business remains always to anticipate consequential societal and legal demands, and that is daunting, especially if there is any hint of retroactive liability.

Canadian companies are aware of the northward migration of U.S. corporate governance standards in the past, especially those inter-listed on U.S. stock markets. Climate change will likely create similar (migratory) patterns and standards.

Investor Pressure

Reaction in the U.S. to legal liability aspects of climate change has overtaken the political debate. The Directors Monthly (“DM”), the journal of the National Association of Corporate Directors, asserts: “Shareholders and institutional shareholders are pressuring companies to address green-house gas (“GHG”) emissions and publicize those efforts through corporate disclosure.” Major U.S. public companies were faced with at least 32 climaterelated resolutions at their annual meetings by mid-2006, demanding disclosure of risks and strategies. The primary focus has been the electric power and oil and gas sectors, but the automotive, banking, insurance, construction and even retail and shopping mall sectors were also targeted. Regardless of the actual outcomes of the resolutions, it is the attention those resolutions require at the highest levels of legal and business management that is noteworthy.

In a February 2006 survey, a group of 225 institutional investors (managing assets of US$31.5 trillion) queried 2,100 companies (including 500 of the world’s largest, the “FT 500”) as to their emissions, remedial actions and risks to the bottom line. Of the FT 500 companies, a substantial majority recognized that climate change provided risks as well as opportunities, while over one third felt that regulatory measures represented financial risk.

While the disclosure regulations of the U.S. Securities and Exchange Commission do not specifically require it, more than 90% of the largest U.S. public companies have recently started to include climate change in their discussions of issues “reasonably likely to have a material effect” on their financial condition or operating performance.

The DM review notes that more than 1,000 companies, including General Motors, Sunoco and Nike, are already using guidelines issued by the Global Reporting Initiative for measuring and reporting on their energy, water and materials consumption, as well as on their GHG emissions.

In October 2006, 14 major institutional investors (representing trillions of U.S. dollars) joined forces with the Global Reporting Initiative and others to publish a Framework for companies to determine what information should be provided to investors concerning the financial risks posed by climate change. Is this the shape of things to come?

Insurance and Other Pressures

The DM review notes that the insurance industry, reacting to the devastating hurricane losses in 2004 and 2005, is now pressuring companies to consider global climate change and GHG as risks, just as any other material financial risks the companies face. The DM review advises board members of U.S. companies that have possible climate change exposures to be aware of increasing court litigation efforts – some “novel” – by plaintiffs to hold those companies liable.

There is also a proliferation of legislative initiatives pending at various U.S. levels, even though the U.S. does not subscribe to the Kyoto Protocol. Control in Congress has changed, while individual states like California have enacted their own GHG laws. This strongly suggests vigilance, careful monitoring and planning.

Business opportunities

On the positive side, the DM review also suggests “the challenges of climate change … present unprecedented opportunities [such as] cost savings, growth, generation of positive public relations and green product branding.” Emissions trading is a new dynamic, and pro-active companies can join 175 others like AEP, Ford, Motorola, DuPont and IBM at the Chicago Climate Exchange to gain realtime experience in this field. Separately, billions of U.S. dollars in funding are available for research into alternative fuels and GHG reduction.

Some Final Notes

U.S. boards recognize the long-term risks and concerns arising from climate change issues, but the DM review sees opportunities for minimizing those risks while maximizing energy efficiencies and “ultimately improving the bottom line.” Undoubtedly, Canadian business, as well as the legal and financial professions, will and should be interested in what our southern neighbours are doing in this new area of corporate governance.