The risk of extreme weather events resulting from climate change and the collective global failure to address climate change represent the most significant current global risks, according to the World Economic Forum’s annual survey of global risks. These kinds of risks represent significant concerns for human safety, social and business disruption, and property loss. As discussed below, and as recent claims have shown, these risks may present management liability concerns as well. The World Economic Forum’s January 15, 2019 Global Risks Report can be found here.

 

Background

The World Economic Forum’s annual risks report is based on an annual survey of forum participants and other multinational survey respondents, in which the participants are asked to rank individual global risks on a scale of 1 to 5. 2019 is the 14^th year that the Forum has conducted the survey. The survey’s methodology is described in detail in the report’s appendices.

 

The risks rated as the highest change for year to year. But just the same, it is particularly striking that of the risks identified in the most-recent survey, the top three are related to, or exacerbated by, the effects of climate change. The top three risks as ranked by the survey respondents according to the likelihood of occurrence and significance of impact are: 1) extreme weather; 2) failed climate change mitigation; and 3) natural disasters.

 

In the report itself, the report’s authors note that the likely impacts arising from these kinds of risks include not only the risk of “value chain disruption” (leading to disruption in the production and distribution of goods and services due to weather events or natural disasters exacerbated by climate change), but also “human food chain” disruption (for example contributing to food insecurity in as many as 23 countries during 2017). It is in this context that the report’s authors discuss the increasing importance the survey respondents attached to the “failed climate change mitigation,” which the survey respondents ranked as the second most significant global risk.

 

A separate section in the report addresses the specific risks associated with rising sea levels, a threat, the report notes, that is exacerbated by coastal erosion as well as the increased numbers of storm surges and increased levels of rain intensity. In many cities, the impacts of rising sea levels are further compounded as the cities themselves sink due to groundwater extraction and the sheer weight of urban sprawl. The threat of property damage and population dislocations may be greatest for some of the world’s largest coastal cities, many of which are continuing to grow by size, density and population. Beyond the direct potential human coasts, the possible damage from increasing coastal or tidal waters include not only possible infrastructure loss, but also loss of or damage to industrial, distribution, and transportation resources.

 

Many of the threats and risks identified in the report will be familiar to any who has read the November 28, 2018 report of the U.S. Global Change Research program (which I discussed in an earlier post, here) – the only difference being that the World Economic Forum is focused on the risks  from a global perspective, whereas the USGCR report is focused on the risks within the U.S. in particular.

 

Discussion

The various risks and threats described in these reports clearly present the risk for human safety and property loss or damage. By the same token, though it might not be obvious at first blush, these changing circumstances also present potential management liability issues as well for the directors and officers of companies whose operations are affected by these risks and changing circumstances.

 

Anyone who doubts that the changing circumstances that climate change presents will want to take a look at the January 16, 2019 Bloomberg article entitled “PG&E Warned Investors About Disasters. It was Mostly Ignored” (here). The company, according to the article, “told investors repeatedly that weather-related disasters were a risk.” The company also included warnings in its regulatory filings how “disasters like wildfires, droughts, and floods, could weigh on its results or disrupt operation.” The company’s investors “didn’t pay enough attention until the company was on the brink of bankruptcy.”

 

The Bloomberg article goes on to say that “PG&E hasn’t hidden its vulnerability to the effects of climate change.” The article notes that the company’s departing CEO described the California drought condition that led to the wildfires the company as had to confront over the last several years as “climate change extreme weather.” The company in fact has implemented a number of initiatives in recent years to try to address the climate change exposures and risks.  Yet, as the article emphasizes, many institutional investors disregarded the risks.

 

Whether or to what extent the company disclosed its risks and apprised its investors and responded to the risks will be tested in the courts. As I have noted in prior blog post (here), PG&E and/or its board already are the subject of shareholder derivative litigation and securities class action litigation, based on allegations relating the company’s losses and exposures relating to the drought-exacerbated California wildfires. Nor is PG&E the only company to face this type of exposure as a result of the California wildfires. The California utility Edison International has also been the subject of a wildfire-related securities class action lawsuit, as discussed here.

 

As the Wall Street Journal reported on January 14, 2018 (here), because of concerns about the company’s wildfire-related liabilities, PG&E is now readying itself for Chapter 11 bankruptcy. It is worth noting in that connection that without a doubt, PG&E represents by far the most significant corporate casualty from the effects of climate change. But while PG&E may be the highest profile recent example, it surely will not be the last example of a company whose operations are significantly disrupted by changed conditions caused by climate change.

 

What is true of the changing conditions PG&E faced as a result of drought conditions in California will likely be true of many other companies as they contend with changing conditions caused by the effects of climate change described in the reports I noted above. As sea levels rise; as droughts become more widespread; as production and distribution supply chains around the world are interrupted, business operations around the world will be disordered. Particularly when these conditions change suddenly, causing unexpected disruptions and business and investor losses, aggrieved parties undoubtedly will seek to hold company management accountable, either for failing to anticipate the potential impacts of changing climate conditions or failing to disclose the vulnerabilities companies face as a result of the possibility of changed conditions.

 

The Bloomberg article about PG&E to which I linked above is interesting, not just for what it says about the company but also what it says about human psychology. The article underscores the fact that PG&E repeatedly tried to tell investors about its climate change-related exposures. The company in fact took a number of extraordinary steps to try to ameliorate its climate change risks. Yet, as the article highlights, investors largely ignored the risks.

 

Just as PG&E’s investors arguably overlooked the company’s own warnings, many investors and other observers are similarly overlooking the exposures that are so well described in the reports I cited above. Indeed I suspect many readers reviewing this blog post are discounting these exposures as they read along.

 

While I don’t pretend to know either the timing or the identities of the companies that will be affected in the months and years ahead, the one thing I know for sure is that PG&E will not be the last company to suffer significant business losses as a result of the changed conditions caused by or exacerbated by climate change. And just as the significant reverses at PG&E have led to D&O lawsuits against the company and its board, the business reverses other companies experience in the future likely will also lead to D&O claims against the companies involved.

 

One final note. I know that it may be important for some readers for me to note that the fourth and fifth top global risks identified by the World Economic Forum’s survey were: 4) Cyber Attacks; and 5) Data Fraud or Theft. These risks also clearly represent significant threats for company’s operating in the global economy. And just as they present business operating risks they also present the possibility for management liability claims as well. It seems significant to me that none of the type five risks identified in the report relate to financial, political, or trade issues.

 

It may be that these other concerns may rise to the top if global financial conditions continue to deteriorate or if tensions continue to rise between and among the largest global economies. Just the same, it seems noteworthy to me that the risks currently perceived at the most significant are not the kinds of concerns on which D&O insurance underwriters traditionally focused.