My sense is by and large we do not regard climate change as a current or near-term risk. Rather, these risks are being managed through existing business continuity and emergency management plans.
This month, the United Nations’ Intergovernmental Panel on Climate Change issued its fifth report on climate change, based on more than 12,000 peer-reviewed scientific studies. The report concluded the rate of global warming has increased significantly faster than was predicted in the IPCC’s 2007 report.
The risks are both big and small, according to the report. Some are materializing quicker than others. They affect farmers and big cities. Risks mentioned in the report involve food insecurity, diseases, transportation interruptions, financial turmoil, and civil unrest. The report stresses the importance of moving towards forms of renewable energy and away from coal, oil, and gas to slow down the pace of climactic change.
Companies may be worried about extreme weather events but that is not to say they are planning for the continuum of climate change. Granted it is not easy to robustly anticipate the future business and economic implications of future climate change and climate policy, all of them characterized by substantial uncertainty. However to not plan on how these implications may affect our clients is to accept, at best, the measures we take will be strictly reactionary.
Climate risk may be a particularly challenging business risk but as the effects of a warmer world begin to increasingly manifest themselves, CEOs, boards, and shareholders will expect legal counsel have taken steps to address the impact it will have on matters such as insurance, supply chain interruptions, secondary sources of supply, location of partners, branch offices, and the like, and contractual obligations and rights in general.
Mitigation against such risks could include:
• Broader disclosure in public securities filings with regard to exposures to climate change and the steps companies are taking to adapt their enterprise to climate change.
• Reviewing insurance policies to examine potential recoveries in the event of losses caused by weather events, and related losses of suppliers, transportation interruptions, and the like, and whether riders are available to cover such exposures.
• Consideration of contractual clauses such as duration, grounds for termination, effects of termination, frustration, and force majeure with a view to allowing companies to adapt to changing circumstances, especially in the case of long-term contracts.
• Providing strategic advice with regard to the selection of suppliers and other partners, the location of key customers, and reliance on transportation infrastructure. Offshoring and the rapid growth of just-in-time distribution systems have created a large exposure with regard to long-term climatic events. The IPCC expects the underdeveloped world will be less able to cope with climate change and its effects on standards of living, and its political and social environment will be more pronounced than in the western world.
• Offering business advice with regard to business opportunities, and how climate change may affect product development, marketing and sales, and return on investment. Anticipated changes may foreclose some opportunities, but at the same time create new markets that formerly did not exist or might not have scaled in the past.
• Reviewing intellectual property protection plans to factor in climate change and the impact it may have on future markets and manufacturing centres.
• Investigating government grants, tax breaks, and other subsidies offered to companies that convert to renewable energy, and addressing issues such as safety, quality, encumbrances, collateralizing purchases or leases of energy-related equipment, and permitting.
• Ensuring contractual provisions such as warranties, representations, conditions, and other obligations relating to compliance with environmental laws apply to future changes in legislation.
• Reviewing employee benefit policies such as health, relocation, and compensation for assumed hardship, in light of changing climactic conditions. It used to be that employees relocated to China would refuse to accept work in Shenzhen or Beijing because of the alarming rates of pollution and preferred to move to Shanghai but Shanghai is rapidly rising up Greenpeace’s list of most polluted cities in China. Increased health risks in China, India, and other economic powerhouses are testing our assumptions with regard to offshoring and long-term planning. It is not surprising China is turning out to be one of the most rapidly growing markets for renewable energy, with the strong, urgent backing of the Chinese government. China is backing solar not just because it has a major position in it; its pollution has so gotten out of hand it needs to begin moving away from dirty coal.
As the global economy has become increasingly interdependent we have made bold moves towards economies of scale, chasing cheap labour markets, and countries with lax pollution, labour, and employment laws. In-house legal counsel was conscripted to make that happen with a view to squeezing out more margin, growing the top line, and scaling businesses. Climate change is causing us to question the wisdom of the last 30 years. The pendulum may very well begin to shift in the other direction, and in-house counsel needs to be aware of the shift and plan accordingly.