Are Firms and Managers At Risk When Contributing to Climate Change?

In 1973, Swiss entrepreneur Stephan Schmidheiny took over as head of the Swiss Eternit Group, a leading manufacturer of asbestos products, three years after the firm had become the biggest single shareholder in the Italian company Eternit. In 2012, Schmidheiny was accused and convicted of causing an environmental disaster through negligence, and of knowingly failing to introduce adequate health and safety measures. This failure led to more than 2,200 asbestos-related deaths in Italy. In 2013 the court of second instance increased the sentence, and found Schmidheiny guilty of causing a permanent environmental disaster with criminal intent. His appeal is currently pending. Should it be unsuccessful, Schmidheiny faces 18 years in prison.1

Being held liable or personally responsible for business decisions can quickly become a nightmare for senior executives. Directors’ and officers’ (D&O) liability insurance has become a multi-billion-dollar market, but D&O insurance is of little use to an executive facing incarceration.

In the wake of perceived malfeasance by corporations, calls for executives to be held liable are common. The Schmidheiny case is worth watching because of its potential repercussions for matters of broader concern. The interesting question is whether or not it is likely that other environmental or human rights issues hold similar risks for executives. A likely candidate here is climate change — or rather, the damage resulting from extreme weather events or regional shifts in weather patterns.

At some point, affected parties will claim damages for losses attributed to climate change, especially if insurance is unavailable or unaffordable. Even today, organizations such as the Climate Accountability Institute and the Climate Justice Programme aim to use the law “to protect the natural environment and people from the adverse impacts of climate change.” Whom will the legal actions target?

The remainder of this article looks at four questions: which organizations might be held liable? On what basis might they be held liable? Will individual executives be targeted as well? Are investors and financial institutions also at risk of being held liable?

Research is already attributing climate change implications, such as rising sea levels and extreme heat, to specific carbon producers. A recent paper2 linked 90 entities, termed “carbon majors,” with emissions that “represent 63% of global industrial CO₂ and methane from fossil fuel (…) and [from] cement” produced between 1751 and 2010. These entities include investor-owned companies such as Chevron (ranked first), ExxonMobil (second), and BP (fourth), as well as state-owned producers such as Saudi Aramco (third) and Gazprom (fifth). Referring to the work of Carbon Tracker,3 the paper states that the carbon majors “possess proven recoverable carbon reserves that will, if produced and emitted, intensify anthropogenic climate change and greatly exacerbate the social, political, and economic challenges related to it.” The paper concludes that carbon majors therefore “hold the key to (…) the future of the planetary climate system.”

Such research is supported by work that aims to develop successful legal strategies. The advocacy groups hope to create sufficient pressure in court to motivate the energy industry to switch to renewable energy sources — or to persuade them voluntarily to adapt their operating models to avoid legal disputes in the first place.

Since states most likely will not agree on a legal regime of state responsibility for climate change any time soon, lawyers are increasingly focusing on private liability to address climate change.4 As private economic actors are largely seen as responsible for climate change damage, to many, liability seems to be an appropriate instrument. There is currently no international liability framework directly applicable to damage related to climate change. Nevertheless, the existing tort system in common law jurisdictions, and the civil liability regimes in civil law jurisdictions, already serve as a basis for addressing property rights-related damage, and allowing an injured rights-holder to obtain monetary compensation for damage.5

One line of work aims to learn from the successes of tobacco control. The 2012 report,6 “Establishing Accountability for Climate Change Damages,” summarizes the outcome of an interdisciplinary workshop organized by the Union of Concerned Scientists and the Climate Accountability Institute. Many years after scientists had concluded that smoking causes cancer, tobacco companies were still winning court cases. The workshop explored why, at some point in time, juries began to find the industry liable. How could a similar shift in public perception be achieved when it comes to climate change? According to the report, “a key breakthrough in the public and legal case for tobacco control came when internal documents came to light showing the tobacco industry had knowingly misled the public. Similar documents may well exist in the vaults of the fossil fuel industry (…)”

Communication strategies address the observation made above, that carbon majors could help mitigate climate change — if they only wanted to, or if they were forced to. A recent article7 points out that carbon majors “have made huge fortunes from fossil fuels (…). In 2013, the combined profits of just four majors — Chevron, ExxonMobil, BP, and Shell — topped USD $94 billion.” The authors emphasize that such returns are only possible because the firms externalize “their products’ highest cost — the climate devastation.”

Might companies also become liable for environmental damage itself? The civil liability regime offers quite a comprehensive approach: it can be used to compensate for property loss and personal injury arising from environmental harm, but it can also be used to compensate for environmental damage per se — meaning, the costs of cleaning up a polluted environment.

This “polluter pays” principle is believed to be an effective means of preventing harm.8 However, in practice, it is difficult to measure environmental damage in financial terms. How can the financial loss associated with a loss of biodiversity be determined, for example?

The current civil liability regime thus only serves as a starting point for the development of a specific liability regime for climate change. Many of the established liability regimes in international environmental treaties set out strict liability rules for hazardous activities, i.e., civil liability for a private promoter or operator of the dangerous activity without fault as a condition for liability, for example in the field of oil pollution, hazardous waste, nuclear damage, industrial accidents, etc.9 This liability is supplemented by fault-based liability for individuals contributing to the damage as a result of negligence or a premeditated act, such as if a company knowingly misled the public.

This development may well be accelerated by the growing debate on the possible classification of climate change as a human rights violation. The impact of climate change implications on the effective enjoyment of human rights seems obvious. The Human Rights Council, for example, has identified climate change implications for the right to life, the right to adequate food, the right to the highest attainable standard of health, the right to adequate housing, the right to self-determination, and human rights obligations related to access to safe drinking water and sanitation.10

There is still dispute, however, on whether or not these identified implications might be classified legally as human rights violations. Disentangling the complex causal relationships between greenhouse gas emissions and specific climate change-related effects is particularly challenging. Furthermore, a person can traditionally only claim an infringement of their human rights after the harm has occurred, whereas the adverse effects of global warming are often projections about future impacts.

In any case, the very fact that human rights are overtly linked to climate change implies that states would be obliged to provide efficient protection to rights-holders, and to ensure that individuals have access to effective remedies to respond to climate change.11 These active, government-level human rights obligations with regard to business-related human rights impacts were reaffirmed in the Guiding Principles on Business and Human Rights (GPs).12 To date, national governments have not systematically implemented mechanisms for victims of business-related human rights abuses, but the GPs have undoubtedly fueled a heated political discussion, and there are increasing moves at state level to hold both companies and senior executives accountable.13

Liability for costs attributed to climate change has already been debated in court.14 Like tobacco firms, the companies that have been sued — primarily utilities — have still been winning these initial cases. That said, based on the observations above, jury decisions might change in line with shifts in public perception. This is likely, given that climate change-related damage will occur more and more.

With the case of Stephan Schmidheiny in mind, are senior executives who run “carbon majors” at risk of being held liable or personally responsible for their business decisions?

In May 2014, Greenpeace, WWF International, and the Center for Environmental Law issued a press release15 in which they asked whether “executives of major fossil fuel companies could face personal liability (…).” The authors believe that liability insurance would not protect executives who mislead the public. Ivo Knoepfel, a sustainable finance pioneer, points out that “particularly those executives who approve high-cost and high-risk projects, for example in the Arctic, will be exposed to future liability claims filed by their shareholders. Such projects are particularly risky as they make additional reserves accessible, while only a fraction of the reserves already proven today can be exploited if we want to meet the internationally agreed-upon objectives.”

In addition to a liability under civil law, in many countries individuals (and companies) may also be held liable under criminal law for the pollution they cause.16 It is evident that the Schmidheiny case is no exception, and that recourse to the senior executives responsible is becoming more and more common — also in the context of alleged human rights violations.

In 2010, for instance, a complaint was filed in Germany against two executive employees of the engineering company Lahmeyer International GmbH. The two executives were accused of flooding more than 30 villages, displacing over 4,700 families and destroying their livelihoods, as a result of the executives’ involvement in the construction of the Merowe dam in Northern Sudan. The competent public prosecutor has since taken on the case.17

The last question worth thinking about is whether investors and other financial institutions that, in some way or another, have benefited from their relationships with carbon majors, will be also subject to liability. NGOs have commonly aimed to make the case that the financial sector carries the responsibility for financing fossil fuel exploitation. However, in contrast to the fossil fuel industry, many of the larger financial institutions acknowledged the urgent need to address climate change many years ago and, more importantly, developed internal and sector-wide approaches to mitigate it.18 However, recent developments such as the decision made by the National Contact Points (NCPs) of the Netherlands and Norway that even minority investors should assess human rights risks set out new requirements for financial institutions and investors.19

It is important to keep in mind that, up to now, Stephan Schmidheiny has not benefited in court from being a sustainability pioneer.20 Critics accused the company — and Schmidheiny — of having reacted too late and too slowly, and of having applied double standards across the organization. Executives leading companies, and those that invest in them, may want to look at Schmidheiny’s example and the rapidly evolving soft and hard law requirements. Social and environmental risks should be taken into account when developing strategies, or when assessing project proposals and investment opportunities.