Climate Change and Environmental Practice

New York Law Journal

December 22, 2006
by Stephen L. Kass and Jean McCarrol

Climate change, as environmental lawyers know, is being accelerated by the increasing - and in the United States often profligate - use of fossil fuels for power plants, motor vehicles and major industrial facilities.

The principal response to this worldwide trend is the effort to establish a universal "cap and trade" system, with the Kyoto Protocol as the first step, in order to reward efficient emissions reductions by power generators and auto manufacturers, while providing financial incentives for developing countries to install state-of-the-art facilities with funds from developed-country firms seeking credit for greater emissions reductions abroad than at home.

For lawyers, this effort is already leading to a highly specialized environmental subpractice in emissions trading schemes under the Kyoto Protocol, the European Union emissions reduction directives, and the proposed California and Northeastern states Regional Greenhouse Gas Initiative (RGGI) programs aimed at creating state emission trading regimes in the United States.

This is a challenging and creative intersection of law, economics and public policy and is attracting intense interest from counsel for power companies, car manufacturers and several new emissions trading exchanges.

Most environmental lawyers, however, do not represent major power companies, car companies or emissions exchanges and may therefore believe (a bit wistfully) that, while climate change is important, it is unlikely to affect their daily practice. We believe that is wrong, and that climate change is likely over the next decade to affect virtually every area of environmental law, including corporate transactions and disclosure requirements, in much the same way that the Resource Conservation Recovery Act (RCRA) and the Comprehensive Environmental Response, Compensation and Liability Act, also known as Superfund (CERCLA), transformed real estate and corporate transactions in the 1980s.

Impacts of Climate Change

While most legal debate has focused on controlling the causes of climate change through reducing greenhouse gases, it is the varied impacts of climate change that will be of concern to most environmental lawyers. Many of those impacts are now inevitable, though their severity will undoubtedly increase if, as seems likely, global emissions continue to increase.

These impacts are expected to include, in addition to sea-level rise and coastal flooding, interior flooding from extreme and more frequent storms, loss of crops from both flooding and expanding desertification, potable water scarcity, migration of flora, fauna and disease, and accelerated urban growth as traditional farmlands become unproductive. National and municipal governments around the world will be called on not only to deal with short-term floods and evacuees, but to provide emergency food, water and health care services, and to undertake agricultural restoration and large-scale urban reconstruction of the sort required in the U.S. gulf coast following Hurricane Katrina. Insurance companies, investors and lending institutions will, after the initial losses, begin to introduce (as some insurers already are) screening standards designed to identify climate change risks.

In short, the impacts of climate change are likely to ripple through entire economies, including the U.S. economy.1  For lawyers, this means a high likelihood of new regulatory requirements, expanded corporate due diligence and risk disclosure and, of course, litigation over the adequacy of both corporate and governmental disclosures and conduct.

Financial Disclosure

It will come as no surprise that power suppliers, vehicle manufacturers and carbon fuel providers (whether petroleum, coal or even natural gas) will be faced with increasing disclosure requirements under financial accounting standards and Securities Exchange Commission (SEC) reporting requirements such as Form 10-K, which requires the disclosure of certain contingencies, including regulatory policies or enforcement actions and private litigation that could materially affect an issuer's future earnings or financial condition.2  The effects of the European Union (EU) cap-and-trade system or even the proposed California and RGGI programs in the United States all bear on the future business prospects for such companies.

However, many other firms face climate change risks, not from regulation, but from risks to the natural resources required for their manufacturing operations, the demand for their services or their potential exposure as insurers. While many of these risks remain remote or speculative, for some companies they are likely to require disclosure in annual reports or SEC filings.

Indeed, the failure to disclose, for example, a company's dependency on fresh water supplies that are threatened by more frequent flooding and contamination or the risks to a company's agricultural supplies (or to its agricultural market) from interior flooding or coastal erosion may also provide a basis for private 10b-5 action under the Securities Act of 1933 or for shareholder resolutions critical of management's performance in anticipating and confronting climate change impacts. Environmental counsel for any client dependent on resources threatened by climate change - water, land, aquatic, flora or fauna - should therefore consider carefully whether financial statement disclosure is required, or at least prudent, since natural resource damage almost always looks foreseeable in hindsight.

Municipalities, too, may face disclosure obligations in their municipal bond offering statements. A city or county government whose water supply, sewage disposal plant, landfill or corporate park is at risk from coastal or interior flooding, or whose insurance has become prohibitively expensive, may need to disclose this risk in its offering statement in order to protect against future bondholder claims.

Corporate Transactions

The same kinds of risks are also relevant to a broad range of corporate transactions. Counsel for firms planning to acquire stock or assets in a company whose wholesale or retail business, or whose manufacturing processes, investments or contractual liabilities would be significantly affected whether by the impacts of climate change or regulatory responses, will in the future have to assess such risks as part of ordinary corporate due diligence.

If, for example, a company's products emit or are produced with significant greenhouse gases, some jurisdictions (notably the EU) may begin to impose a carbon tax, or even import controls, that make those products uncompetitive.3  If a company's operations need to be significantly re-engineered to install emissions controls or to use alternative fuels or products, that cost will be of interest to prospective purchasers as well as current and future investors. It will therefore be important to integrate potential climate change impacts into company "Environmental Management Systems" under ISO 14001 (or, in the case of firms active in the EU, the EcoManagement and Audit Scheme or EMAS program).

An increasing number of institutional investors are already beginning to examine corporate climate change preparedness as part of their overall environmental awareness. Voluntary corporate conduct programs such as Ceres (a joint venture of environmental, corporate and investor groups) and the "Carbon Disclosure Project" have begun to issue regular reports on corporate climate change practices, both to advise the public of their comparative environmental responsibility and to help institutional investors assess long-term corporate prospects.4

Such reports will also help shape public policy decisions when Congress, as well as state and federal regulators, finally begin to address U.S. climate change practices in a manner already under way in the EU. Here, too, environmental counsel will be called upon to help guide clients through new regulatory requirements and, ever more importantly, to help clients understand and adapt to the new environmental conditions and challenges that our developed economies have created for mankind.

Stephen L. Kass and Jean M. McCarroll, together with Clifford P. Case III, direct the environmental practice group at Carter Ledyard & Milburn LLP.

Reprinted with permission from the December 22, 2006 edition of The New York Law Journal © 2006 ALM Properties, Inc. All rights reserved. Further duplication without permission is prohibited.

1 See Stern Report to U.K. Government

2 See GAO Report to Congressional Requestors on Environmental Disclosure (July 2004),; see also Lewis & Little, "Fooling Investors and Fooling Themselves: How Aggressive Corporate Accounting and Asset Management Tactics Can Lead to Environmental Accounting Fraud" (July 2004),

3 See Directive 2003/87/EC of the European Parliament and of the Council of Oct. 13, 2003; RINA Summary of Directive 2003/87/EC,; New Guidelines on Environmental Management and Reporting, sponsored by the Department of Trade and Energy (United Kingdom),

4 See Global Framework for Climate Risk Disclosure (October 2006),; see also the Carbon Disclosure Project's Web site, which contains disclosures made by specific companies and summaries, reports and analysis related thereto. The Global Reporting Initiative's Web site contains sustainability reports for specific companies: Its Sustainability Reporting Guidelines (G3) can be found at:

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