I have talked about climate change liability risks for company directors here and here. Climate change has all the potential of turning into a major corporate governance issue.

Jeffrey Smith and Matthew Morreale from the law firm Cravath, Swaine & Moore say that climate change is a whole new ball game for directors. They explain why in their New York Law Journal piece, republished in

They point out that there have been plenty of cases where shareholders have alleged directors failed in their duty of care. Climate change, they say, is not that far removed.

"Without forcing the parallels, because climate change is in many respects sui generis, a similar suite of allegations could readily be brought against a company for its responses to this new challenge," they write.

"A utility might be challenged for the way it conducted a technical investigation to determine its greenhouse gas (GHG) emission reduction strategies.

"A company might be faulted for its dealings with significant external forces, such as nonuniform and volatile state and regional regulations, or the rapidly evolving science related to management of its carbon footprint, such as the cost and feasibility of carbon sequestration technology. A company might also ill-advisedly entrust the technical assessment of its carbon emission position to employees who lack necessary skills or market sophistication."

What makes climate change different, they say, is that there are five new variables: uncertain and fragmented environmental legislation and regulations; the reactions of capital and insurance markets to emerging business opportunities (and matching risks) posed by climate change; stakeholder activism; pending litigation and the rapidly evolving scientific debate over proper responses to climate change.

Exactly how this will play out remains to be seen. But what's clear is that directors can no longer afford to ignore it.

26 Jul 2007