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The Business of Climate Change


[T]he largest contributors to [greenhouse gas] emissions are corporations

Kathryn Douglass1

I Introduction


This chapter will analyse how businesses are beginning to drive reductions in greenhouse gases emissions in aquest for sustainable market opportunities.2Traditionally, private enterprises eschew governmental control and emissions trading is usually presented as anathema to business. However, shareholders, creditors, insurance agents, and employees aware of climate change risks are reaping reliable returns in a low carbon world. The leading change comes from investors who perceive soaring risk in high carbon portfolios.  Businesses have taken to reducing greenhouse gases in an effort to avoid strict regulation, strengthen customer loyalty, access talented employees, create a competitive advantage as well as enhance business relationships. These measures have been achieved alongside efforts to increase corporate disclosure of greenhouse gas emissions and the financial reporting of climate change risks. These challenges are incorporated into directors’ duties either through the duty of care, skill and diligence or the stricter test of a duty to act in the best interests of the company. Shareholders have, therefore, been active in prompting directors into action. Against this background, though, businesses have had to be careful of greenwash. These are representations that present unsubstantiated carbon neutral claims. To be effective, if businesses are to adopt carbon neutrality such businesses must not misinform consumers or the market. With accurate information, however, the market can reduce greenhouse gases by supporting businesses which have transformed climate change risks into opportunities.

II The Business of Climate Change


            Companies face a plethora of climate change risks. The most obvious risk is physical. The effects of climate change are likely to include rising sea levels threatening coasts, ocean acidification affecting fish, and an increase in extreme weather events such as droughts, bushfires, floods, cyclones and hurricanes. Corporations which operate in agriculture, forestry, fisheries, property, insurance and tourism sectors will be appreciably affected.3Secondly, the emergence of emissions trading through the CCRA 2002 presents a regulatory risk to New Zealand corporations. NZETS participant obligations include the monitoring and reporting of emissions as well as the holding, transferring, surrendering, and cancelling of emissions units. Thirdly, a derivative risk is insurance. When insurance becomes too expensive, or is withdrawn, previously insured activities may lead to insolvency or bankruptcy.4 It has even been mooted that insurance companies may withdraw liability insurance for directors of companies that do not have adequate climate change risk policies.5Fourthly, climate change litigation has developed as a systematic method of reducing greenhouse gas emissions which may affect private corporations. Fifthly, there is the market risk that a company’s competitor will maintain customer loyalty if customers prefer the competitor’s position on climate change. Those that fail to consider the higher operating costs, reduced profit margins, lower growth forecasts, damaged reputation and compromised customer loyalty engendered by greenhouse gas emissions without capitalising on potential opportunities place themselves at an economic disadvantage.6Sixthly, capital risk means that companies may be unable to obtain capital because financial institutions are concerned about climate change risk. Financial institutions are becoming wary as financing decisions “which result in harm to society or the environment will ultimately affect shareholder value.”7

             Capital climate change risk is the driver of change in the financial services market through a number of international voluntary codes. The Equator Principles (designed in conjunction with the World Bank and the International Financial Corporation)8are designed primarily for activities in developing countries and now these principles apply to 85 per cent of the world’s financing of cross-border projects.9Projects worth over USD 10 million are screened into environmental risk categories. High impact projects require a comprehensive assessment of environmental effects. This can include a project’s quantification, monitoring and managing of greenhouse gas emissions.10 In 2006, some signatories to the Principles withdrew funding and assurances relating to the Sakhalin II oil and gas pipeline project in Russia in part due to environmental concerns.11 Additionally, the United Nations Global Compact aims to build sustainable markets.12It seeksto promote greater environmental responsibility though corporate sustainability reporting. The United Nations Environment Programme Finance Initiative has produced Guidelines for Sustainability Management and Reporting which enhance reporting of non-financial information for stakeholders.13Moreover, the United Nations Principles of Responsible Investment is a framework designed for institutional investors to fulfil fiduciary duties to act in the long term interests of beneficiaries by incorporating into the investment process environmental, social and governance analysis.14Similarly, the OECD Guidelines for Multinational Enterprises as an annex to the OECD International Declaration on International Investment and Multinational Enterprises details responsible business conduct to promote sustainability in international investment law.15

            Climate change capital risk is being pushed by the integration of international investment law and sustainable development. The New Zealand Business Council for Sustainable Development recognises that the entrenchment of short-term results through hyper-competition creates unpredictability and by taking into account social and environmental considerations a greater level of investment security is assured. Sustainable development is about achieving a balance between economic, social and environmental concerns to provide for present and future generations. In this light, sustainable development requires companies to make money for shareholders.16Uneconomic activity is, by definition, unsustainable. A legislative requirement is found in s 58 of the New Zealand Superannuation and Retirement Income Act 2001 which provides for investment on a prudent, commercial basis consistent with “best-practice portfolio management”, “maximising return without undue risk to the fund as a whole” and “avoiding prejudice to New Zealand’s reputation as a responsible member of the world community.”17With these objectives, the fund has become a signatory to international documents described above.18Likewise, s 4 of the State-Owned Enterprises Act 1986 provides that the principal objective of every state-owned enterprise is to operate as a successful business which is “profitable and efficient” in order to be a “good employer” in a way which the organisation “exhibits a sense of social responsibility by having regard to the interests of the community in which it operates and by endeavouring to accommodate or encourage” such interests.19The consideration of non-financial factors by quangos (quasi-autonomous non-governmental organisations) represents indirect governmental pressure to focus on long-term economic performance. Such requirements have not translated into provisions for private enterprises to consider non-financial performance in the Companies Act 1993 despite reforms in the United Kingdom20requiring greater legislative deference to be given to stakeholders as well as calls for reconsideration here.21

            A variety of international organisations are exerting pressure. The most prominent are non-governmental organisations such as Friends of the Earth, the World Wildlife Fund (WWF), and Greenpeace in advocating addressing climate change risks. Less well known groups such as the Institutional Investor Group on Climate Change (IIGCC) have formed to act as a collaborative forum for investors such as superannuation funds and asset managers to assess climate change risk.22Additionally, the Coalition for Environmentally Responsible Economies (CERES) is a coalition of investors and public interest groups to integrate sustainability into the day to day business practices for the health of the planet and its people.23Its subsidiary, the Investor Network on Climate Risk, aims to tackle the corporate governance challenges of climate change.24For present purposes, the Climate Principles and the Carbon Principles are particularly relevant.25These integrate climate change into business activities to reduce risks and enhance opportunities with the latter principles being signed by the Bank of America, Citi, Credit Suisse, JP Morgan Chase, Morgan Stanley and Well Fargo in 2008.26The Carbon Principles were a response to uncertain climate change policy and encourage “cost-effective energy efficiency, renewable energy and other low carbon alternatives to conventional generation, taking into consideration the potential value of avoided [greenhouse gas] emissions.”27Although these developments are legally non-binding, such developments seem to inform the standard of what a reasonable director ought to do to address climate change business risk.

            There are, naturally, many variants to corporate governance models which include non-financial imperatives. Corporate social responsibility advocates that “with power comes responsibility. The unprecedented reach, scale and complexity of modern corporations has rendered obsolete that they are somehow separate and removed from the larger community.”28There is a strong business case for corporate social responsibility models of wealth creation by reducing risk through the avoidance of strict regulation, accessing a broader employee talent pool, strengthening customer loyalty, creating a competitive advantage thereby increasing market share as well as enhancing relationships with financiers, insurers, and supply networks that are attracted to such corporate principles.29The need for corporate social responsibility is present in The Corporation: The Pathological Pursuit of Profit and Power where Bakan argues that a purely profit driven motive results in companies acting similar to a psychopath.30Despite these concerns, Watts argues that corporate social responsibility is undemocratic and socialist.31Yet, a company may have more influence in a region than any legislature. Some regions concerns may never be heard at all by the legislature or by the company. The environment is, after all, an involuntary non-anthropogenic stakeholder.32In terms of socialism if the legislature is prepared for its own corporations to feature corporate social responsibility characteristics, a logical extension is for all corporations to be held to such conduct. The public / private divide is hardly exacting but is a matter of perspective.33Moreover, the relationship between fiduciary obligations and climate change is emerging.34Thus if stakeholder considerations were to be mandated, it is preferable for other interests to be considered in permissive rather than mandatory terms.35

III Disclosure of Corporate Greenhouse Gas Emissions

            Mandatory information disclosure is among the most cost-effective environmental tools.36The United States Toxic Release Inventory is a prominent example of how regulation by revelation can be achieved.Firms are required to disclose specified toxic releases into the environment.37If companies’ emissions are disclosed and compared with competitors, the information serves to stigmatise environmental harm. Companies which demonstrate a good environmental programme are accordingly rewarded by the market. If such disclosure was to be adopted, standardisation and transparency are essential as such reporting can be misleading to consumers. The Carbon Disclosure Project aims to overcome such difficulties and encourages businesses to report voluntarily greenhouse gas emissions, disclose the aims of the business to reduce greenhouse gas emissions and consider how low carbon business opportunities are adopted.38In 2011, 42 per cent of the top 50 New Zealand companies answered the Carbon Disclosure Project questionnaire which compares unfavourably with the 68 per cent of the top 500 United States companies.39Problematically, only 45 per cent of the New Zealand respondents saw regulatory opportunities out of climate change which is the lowest of all countries surveyed.40In the United Kingdom, disclosure of greenhouse gas emissions is recognised by s 85 of the Climate Change Act 2008 (UK) which has the potential to introduce mandatory greenhouse reporting if the Secretary of State introduces regulations to require “such information as may be specified in the regulations about emissions of greenhouse gases from activities for which the company is responsible.”41

            Corporate greenhouse gas disclosure is frequently associated with the subpoena of five energy companies by the Attorney-General in New York State in 2007.42This investigated whether investors were being properly informed about the financial risks posed by the company’s large greenhouse gas emissions. The Attorney-General cited that no disclosure of projected greenhouse gas emissions from activities were reported, there was no attempt to evaluate exposure to anticipated greenhouse gas regulation and other related climate change information had been withheld. In 2008 the Attorney-General settled with one of the companies as it disclosed current emissions, projected emissions, strategies for managing emissions, the financial risks of present and probable emissions regulations as well as the physical impacts of climate change.43Against this background, in 2010 the United States Securities and Exchange Commission issued Commission Guidance Regarding Disclosure Related to Climate Change.44This guidance related to interpretation of the S-K Regulations which regulate part of the yearly report that publicly traded companies are required to give investors.45The regulations require disclosure of a description of the business (Item 101), legal proceedings (Item 103), risks (Item 503(c)), and current trends and uncertainties (Item 303).46The guidance reminds “companies of their obligations under existing federal securities laws and regulations to consider climate change and its consequences as they prepare disclosure documents [for] investors.”47

            Cameron records that “[b]eyond the NZ ETS, there is no positive legal obligation on New Zealand businesses to disclose climate change-related information about their operations.”48In Australia, by contrast, s 299(1)(f) of the Corporations Act 2001 (Cth) which provides that a director’s report for a financial year must include details of the entities performance in relation to environmental regulation.49This is complemented by provisions in s 299A(1) and s 674.50In New Zealand, full prospectuses for equity securities require the description of the activities of the company, specified financial statements, prospects, forecasts, business acquisitions, material contracts, pending proceedings, and other material matters.51Requirements for short form prospectuses, simplified disclosure prospectuses, and investment statements have similar but truncated requirements. In terms of continuous disclosure obligations for publicly listed companies, the New Zealand Stock Exchange Listing Rules requires public notification of material information.52Material information is information about a company which a reasonable person would expect would have an effect on the company’s share price.53This is information that, for instance, changes the company’s financial forecast or expectation, changes the general nature of the business, and may include acquisitions or dispositions that break a specified threshold.54It should be noted here that the mere sale and purchase of emissions units themselves are not subject to Securities Act 1978 but the financial implications of emissions units on equity securities are subject to such requirements.55Annual reports of New Zealand companies, publicly listed or otherwise, must include financial statements to be sent to its shareholders.56Such reports need to be completed in accordance with Financial Reporting Act 1993.

            The manner in which emissions units are reported for accounting purposes has been subject to international debate. In New Zealand, financial statements of a reporting entity must comply with generally accepted accounting practice.57The International Accounting Standards Board which standards New Zealand follows created a draft interpretation on emissions units which companies complained “would force them into showing a completely distorted picture of their performance in their annual and interim financial statements” because of the volatility in the emissions trading market.58In an attempt to remedy the situation, some accountants stated that if an entity emitted no more than granted emissions units, no cost emerged.59Others argued that hedge accounting should be permitted between emissions units and the liability created by surrendering.60In this light, Cook reasons that “a grant of assets that are extremely likely to have to be repaid is a liability, notwithstanding that the assets can be used independently in the meantime in market transactions.”61

In New Zealand, leading accountant firm Ernst & Young advise that the accounting treatment of emissions units is evolving.62If an emissions unit is treated as a government grant, the grant is recognised as income “over the periods necessary to match them with the related costs which they are intended to compensate, on a systematic basis.”63A government grant can be valued at fair value or nil.64If valued at fair value, the emissions unit will be treated as an intangible asset65or if held for resale as inventory,66different valuation rules apply. If emissions units are purchased, the intangible asset or inventory rules apply.67When emissions units are used for meeting emissions obligations by surrendering emissions units, the accounting treatment follows a contingent liability approach where no liability arises until surrendering is required.68This will be when specified activities occur.69Before surrendering, the valuation of emissions units can follow the market value approach as advocated by the International Accounting Standards Board in its draft interpretation;70the cost of settlement approach where emissions units are valued at fair value as assets as well as the cost of buying any additional emissions units needed;71or the net liability approach where emissions units are valued at nil apart from the cost of additional emissions units to settle any liability.72

These different accounting tools reflect the innate complexity of disclosing climate risk on the balance sheet. Although disclosure is plainly desirable, disclosing just the financial implications of emissions units in reporting without reference to greenhouse gas emissions can have potentially distorting effects. For instance, when forestry gains emissions units and has to surrender emissions units for deforestation or fire, depending on the accounting method used, there will be an attraction or deterrence of investors. Of course, emissions unit liability is attracted at the time of deforestation even though the release of carbon to the atmosphere may be years if not centuries away.73

As the carbon market stabilises and full exposure to emissions trading occurs, the accounting treatment of emissions units will be standardised and financial reporting may be more than enough for investor disclosure. Until such time, it is recommended that the transparency of the market would be better served through disclosure of greenhouse gas emissions even though there is currently no legal requirement. While at the present time climate risk could breach the materiality threshold required for disclosure as full exposure to emissions trading takes place, the materiality threshold for disclosure of climate risk will almost continuously be met for high carbon producing companies. The Carbon Disclosure Project has a long road ahead in New Zealand but international investor pressure which requires disclosure of emissions to shareholders is a trend worth encouraging.


IV Directors’ Duties

A          Duty to Act with Care and Diligence

Assessment of climate risk which reduces greenhouse gas emissions can also be enforced through directors’ duties to a company. Under s 137 of the Companies Act 1993, a director of a company when exercising powers of performing duties as a director, must exercise the care, diligence and skill that a reasonable director would exercise with reference to the nature of the company, the nature of the decision, the position of the director and the nature of any responsibilities undertaken. This independent statutory duty works alongside the duty of care in equity and the common law duty of care in negligence.74The duty is owed to the company and not to individual shareholders or third parties.75The test has a degree of objectivity as it is one of a reasonable director judged in the same circumstances.76The standard of care requires that a reasonable director is informed as to the dealings of the company, to undertake inquiries if relevant, and seek competent advice where prudence is required.77While New Zealand does not have a business judgment rule, the preamble to the Companies Act 1993 endorses an allowance to directors of having a wide discretion in matters of business judgment.78In this respect, Daniels v Anderson elucidates that a director is not an ornament but an essential part of corporate governance.79A director must appreciate the effect of a changing economy on business and bring informed and independent judgement to bear on matters that come before the board.80The director must become familiar with the fundamentals of the company’s business and maintain familiarity with the financial status of the company through a regular review of company financial statements.81

It is submitted that an appreciation of climate change risks will require the attention of directors in certain industries. The NZETS’s requirements for purchasing and surrendering emissions units for mandatory and voluntary participants will obviously require consideration.82For instance, a decision to voluntarily opt-in to the NZETS which is available for forestry and jet fuel purchasers will have financial implications for the company.83Even the forestry decision to follow the look-up tables for carbon sequestration of certain age and variety of trees versus adopting a field measurement approach which actually physically measures the carbon sequestered could have considerable financial implications.84Likewise, if an EITE firm fails to apply for a free allocation of emissions units, no emissions units will be allocated with the associated financial repercussions.85Businesses would be well advised to undertake careful due diligence when purchasing a business in order to understand emissions trading obligations and liabilities.86There are a number of offence and penalty provisions in the CCRA 2002 if mandatory participants fail to comply with these obligations.87This can be sheeted home to directors and managers of companies.88This includes incorrect monitoring, calculating, and reporting of emissions and removals.89Commentators Shearing, Bubna-Litic and Troiano all submit that a breach of duty of care may occur where a director fails to prevent a breach by the company of emissions trading scheme.90This could be in addition to any penalty imposed or adverse reputational effects. The self-assessment nature of emissions trading has strong compliance and enforcement mechanisms. Additionally, Shearer submits that a failure to consider climate change risk over and above any emissions trading scheme such as that to long-term infrastructure from climate change impacts may amount to a breach.91

If the reward of profit maximisation is greater than the punishment created for a company to break the law, it makes economic sense for a company to break the law and undertake illegal activities. Companies like human beings are persons to which the law applies.92If an action is taken by a director which is illegal such action can be attributed to the company or is achieved through “ordinary authority concepts.”93The company does not cease to be a legal entity because of the illegal action. Nor is the chain of agency broken by illegal acts.94In this way, Watts suggests that s 16 of the Companies Act 1993 “impliedly authorise[s] the board to act illegally.”95Watts adds that such authorisation “does not immunise them from their duties to act in the best interest of the company and with due care and skill.”96An extension of this argument is that equity follows the law97and ignorance of the law is no excuse for undertaking illegal activities.98Directors in sophisticated commercial entities must, of course, be aware of potential legal implications of decisions. Hence to the extent that directors have an option of whether or not to comply with the law, if they act illegally, there will almost certainly be a breach of the duty of care, skill and diligence.99That said, a director acting illegally who rewards shareholders and directors handsomely will not find anyone willing to enforce that duty. As environmental penalties can force companies into insolvency,100

any claimants could subsequently bring proceedings for previous breaches of duties even though it is within directors’ powers to act illegally. If it was found that a company could commit illegal acts such as failing to comply with the NZETS with impunity, this would trivialise the true meaning of a director’s duty of care to the company.


B          Duty to Act in Good Faith and In the Best Interests of the Company

Section 131(1) of the Companies Act 1993 provides that “a director of a company, when exercising powers or performing duties, must act in good faith and in what the director believes to be the best interests of the company.”101Again, importantly the provision is owed to the company and not to individual shareholders or third parties.102The provision has been judicially interpreted to mean disloyalty, mismotivation and protecting against conflicts of interests by directors.103Bad faith has been interpreted in to mean a “conscious failure to make a genuine attempt to do what a careful director would do.”104Gross negligence is not sufficient; recklessness may be required; although gross negligence will be treated as evidence of mismotivation.105Watts explains that commonly “the offending motivation will be pure self-interest on the part of the relevant director.”106As long as the director acts in the best interests of the company, directors may favour other interests.107The case of Southern Real Estate v Dellow is a useful example of a breach of loyalty.108Before resigning, a director systematically undermined the business with the aim of setting up a competing business. The director was held to be “acting with manifest conflict of interest.”109Acting in the best interests of the company is a controversial phrase for environmental advocates.110The reason is that the duty is owned to the company as an independent entity even though judicially shareholders have been held to represent the interests of the company.111Treating the shareholders as the company is complicated because not all shareholders will have the same interests. Are directors to consider the interests of all the shareholders, the majority of the shareholders, the minority of shareholders, individual shareholders, past shareholders or even future shareholders? New Zealand has found that the interests of current shareholders as a whole must be considered.112In this respect, advocates of the shareholder primacy theory stipulate that consideration of other stakeholders in a company means a duty is owned to no one.113However, creditors,114employees,115and individual shareholders116may already be in a fiduciary relationship with the company in specified circumstances. As Palmer observes, “the company’s interests are dynamic, not static.”117The proposition that the best interests of the company are only compromised when a director acts in a conflict of interest presents bizarre consequences when investors halt funding; a crown subsidiary issues enforcement proceedings for environmental damage; customers systematically boycott a company’s goods; or a mass resigning of employees takes place. The wording of the provision in light of international developments118would suggest that s 131(1) is deliberately openly worded. No references to loyalty or conflict of interest are in s 131(1). Even the archetype of fiduciary duty, the client-lawyer relationship goes further by stipulating that a lawyer “has a duty to act in the best interest of his or her client without regard for the personal interests of the lawyer.”119

Based on commercial expectations, it is doubtful any court would find such arguments convincing without legislative encouragement. Nonetheless, the current wording risks misinterpretation by directors who focus solely on profit and is divorced from the complexities of the modern world.


It is suggested, therefore, that a better understanding of the provision lies in the associated duty of good faith. A disloyal director will hardly be acting bona fide. Shearing asserts that a director’s failure to consider climate risks and opportunities may result in shareholder claims that directors have breached their duty to act in the bests interests of the company.120Nonetheless, it is submitted that in New Zealand such a breach would only occur in the most egregious of situations. This could involve a habitual breach of emissions trading obligations. Again, if a business blindly situated buildings in areas susceptible to sea level rises there could be a breach. This is because it is still possible to act in good faith even though incompetence is “virtually certain” to have breached a director’s duty of care.121Shearing concludes that climate change “poses important issues for… protecting the long-term viability of the company.”122Watts takes the view that as the shareholders can put the company in liquidation that only short-term interests of existing shareholders matter.123The preferable view is that of Watson who points out “there is no doubt that directors may at the very least look to the future of the company and the interests of future shareholders.”124It may well be in the best interests of future shareholders to liquidate a company. Although evidently tenuous, Troiano even proposes that liquidation on public interest grounds could be used where a company has persistently ignored the impacts of climate change.125In any event as Watts recognises, a great deal of latitude is given to directors in carrying out their duties as courts should not run companies worldwide.126

The words “good faith” set a high standard loyal to the provision without the need to enter the broader shareholder / stakeholder debate.


C         Enforcement

As the duties under ss 131 and 137 of the Companies Act 1993 are owed to the company rather than to individual shareholders, only the company may maintain an action against the directors.127In order to enable a shareholder or director to enforce such duties, s 165 allows the High Court to grant leave for a shareholder or director to bring proceedings to act in the name of or on behalf of the company.128Known as derivative action, the Court in exercising its discretion will have regard to the likelihood of the proceedings succeeding, the costs of the proceedings in relation to the benefit obtained, other possible avenues of relief, and the interests of the company.129Leave will only be granted if the Court is satisfied that the company does not intend to bring proceedings itself or that the interests of the company mean that the proceedings should not be left to the directors or the shareholders as a whole.130The Court will consider whether a prudent business person would have considered pursing such a claim.131This includes the amount at stake, the apparent strength of the claim, likely costs, and the prospect of executing any judgment.132Although this test is usually a strict economic exercise in terms of the benefits to be obtained from litigation, any Court will prefer negotiation, mediation133and even arbitration134where possible. Even though deterrence has been mentioned,135litigation costs loom large.136

For carelessness related to climate change risk particularly, litigation must be treated as a last resort. This is because there are more subtle and effective ways to prompt directors into action.


D         Shareholder Resolutions

A cheaper alternative to addressing such risk are shareholder resolutions. Under ss 120 – 121 of the Companies Act 1993, an annual meeting of shareholders or a special meeting of shareholders may be called. Before such a meeting, a shareholder “may give written notice to the board of a matter the shareholder proposes to raise for discussion or resolution at the next meeting of shareholders.”137These provisions, in addition to s 122 which allows for resolutions in lieu of meetings, allow shareholders to alert directors to the need to address climate risk.138A related mechanism is a management review by shareholders under s 109.139 In 2011, non-governmental organisation CERES reported the filing of 111 shareholder resolutions with 81 North American companies on climate change and other sustainability concerns.140For example, shareholders of both Avon Products and the Hershey Company sought to adopt and implement procurement policy for sourcing certified sustainable palm oil.141Palm oil can increase greenhouse gas emissions because it grows on peat soil.142Shareholders of Dr Pepper Snapple, likewise, sought to address climate risks in the supply chain.143It is to be noted, however, that such resolutions are rarely passed.144Many resolutions are withdrawn after companies meet shareholder demands to address regulatory, competitive and reputational pressures for mitigating greenhouse gas emissions.145A striking instance of shareholder dissatisfaction occurred when United States corporation TXU Energy decided to build eleven new coal-based power plants.146Investors revolted and the share price plummeted amid concerns over emissions costs.147A buyout by environmentally conscious equity groups was successful and eight of the eleven coal plants were abandoned.148

V Greenwash: Misleading and Deceptive Carbon Claims

Measurement of greenhouse gas emissions for businesses is a complex exercise. Carbon offsetting and carbon neutrality are increasingly sold by businesses as a way by which individuals can reduce the effects of climate change.149However without advertising accuracy, customers will lose trust in environmentally beneficial products. Greenwashing, misleading consumers about the environmental attributes of a product or company, is on the rise.150In New Zealand, s 9 of the Fair Trading Act 1986 provides that no person shall, in trade, engage in conduct that is misleading or deceptive or is likely to mislead or deceive. Such conduct is judged by its effect on reasonable members of the class of people to whom the conduct is directed.151The conduct must be considered holistically and a failure to communicate certain facts or matters when required may be considered as part of that conduct by way of an omission to act.152The misleading or deceptive conduct test is objective having regard to all the circumstances and the persons who have been affected.153Hence, conduct which lacks culpability does not absolve such conduct.154Importantly, therefore, it is unnecessary to prove damage just likelihood thereof.155Sections 10 and 11 of the Fair Trading Act 1986 create a criminal offence156that “no person shall, in trade, engage in conduct that is liable to mislead the public as to the nature, manufacturing process, characteristics, suitability for a purpose or quantity of” goods or services.157These provisions of the Fair Trading Act 1986 work alongside misrepresentation in the law of contract, and negligent misrepresentation and deceit in the law of torts. Given the difficulties that arise with carbon claims, New Zealand,158Australia,159Canada,160United States,161and the United Kingdom162all have green guides issued by the relevant government department explaining what is acceptable advertising.

For greenhouse gases, the Greenhouse Gas Protocol developed by the World Business Council for Sustainable Development and the World Resources Institute is an international accounting tool for quantifying and reporting. This was adopted by the International Standards Organisation in ISO 14064-1, ISO 14064-2, and ISO 14064-3. These include requirements for the design, development, management, reporting and verification of an organisation’s greenhouse gas inventory. These work in parallel to the Climate Registry, PAS 2050, and the Voluntary Carbon Standard which aim to have consistent methods to calculate, verify and publicly report greenhouse gas emissions. The Greenhouse Gas Protocol covers the six gases regulated by the Kyoto Protocol although other greenhouse gases can be reported.163Emission sources are categorised into three scopes.164

Scope 1 is direct greenhouse gas emissions which is emissions that occur from sources owned or controlled by the company. Scope 2 emissions are indirect emissions from electricity purchased by the company. Scope 3 emissions are other indirect greenhouse gas emissions such as transportation of fuels, waste disposal and the use of sold products and services. Carbon neutrality of one of these scopes without explaining that there is not carbon neutrality of another could amount to a misrepresentation. For instance, claims of carbon neutral air travel will usually just take into account the emissions to carry one passenger from one destination to another. It may not consider the electricity used in running offices and maintenance of the air fleet. Nor would it usually count employee travel to and from work or work related air trips required for the company’s operation.

In Australian Competition and Consumer Commission v GM Holden, GM Holden advertised that its Saab cars had “carbon emissions neutral across the entire Saab range.”165The advertisements explained that Holden would plant 17 native trees in the first year as a carbon offset for each vehicle sold. The Australian Competition and Consumer Commission (ACCC)issued proceedings over the misleading advertisements as the greenhouse gas emissions from any Saab vehicle would not be neutral over the life of that motor vehicle as the tree planting referred to would not provide a carbon offset for more than a single year’s operation of any Saab vehicle. The Commission sought an injunction restraining further advertising on the previous terms, corrective advertising, and an order requiring the company to have an independent assessor make improvements to compliance.166GM Holden on its own accord agreed to plant 12,500 native trees to offset the carbon emissions for Saabs sold over the period of advertising based on a 10 year vehicle life.167This was because GM Holden accepted that the advertisement could be interpreted in the manner contended.168

Greenwash has been found in a number of other cases. In Australian Competition and Consumer Commission v Global Green Plan there was misleading and deceptive conduct where customers paid for renewable energy certificates but Global Green Plan did not use all the money obtained to purchase certificates.169Similarly, the ACCC and Sanyo settled after Sanyo claimed its Eco Multi Series air conditioners were environmentally friendly for a new ozone era. Unfortunately, the substance used was a potent greenhouse gas.170Related settlements were reached with air conditioning competitors Daikin, Dimplex and De Longhi.171The ACCC also investigated Goodyear about its Eagle LS 2000 tyres which it claimed were environmentally friendly, had minimal environmental impact and production resulted in less carbon dioxide emissions but such representations could not be substantiated.172In addition, Energy Australia claimed that electricity generated would be totally from accredited renewable resources but some of Energy Australia’s electricity came from non-accredited sources.173Likewise, Prime Carbon was investigated about the supply of carbon credits which claimed affiliation with the National Stock Exchange which it did not have and representations about the status of National Energy Registry which were not correct.174There was a strong inference that Prime Carbon had received government sanction which was untrue.175Orders were made restraining the company and its director from engaging in such conduct, requiring compliance training, and for publication to the company’s customers by letter of the misrepresentations.176

Green advertising can be confusing to consumers. For instance, some surveys record that almost a majority of consumers think that carbon dioxide depletes the ozone layer which as a matter of science is impossible.177Other surveys reveal that a sizable minority of consumers think that “made with renewable energy” claims means that a product is made from renewable materials, recycled materials, or that the product itself is recyclable.178Even so, a degree of consumer knowledge must be presumed and the objective of the environmental claim is what is actually important. ACCC, therefore seemed to be pushing the boundaries in finding a misleading claim in the V8 Championship Series.179The V8 Supercars claimed that the planting of 10,000 native trees would offset the carbon emissions from the V8 Championship Series.180The Commission was concerned that customers would think that the 10,000 trees would absorb the carbon emissions over a short period of time when in fact the emissions would be absorbed over the life of the tree.181

It is arguable that most reasonable green consumers would know that a tree must be planted and must grow to sequester carbon over time and if sequestration was to take place immediately, then the alternative of purchasing emissions units as an offset would be used. Such heavy handed regulation may deter companies from attempting carbon neutral projects at all.


VI Conclusion

Traditionally, reducing greenhouse gases through an emissions trading scheme has been presented as the ruin of modern businesses. This is because private enterprises tend to shun governmental control. This chapter has seen that shareholders, creditors, insurance agents, and employees informed of climate change risks have seen business opportunities and are being rewarded by the market. Investors have been particularly active in shying away from high carbon portfolios with high climate change risk. Instead, investors have moved to invest in businesses which reduce greenhouse gases because such businesses avoid strict regulation, strengthen customer loyalty, access talented employees, create competitive advantages and enhance business relationships. Disclosure of greenhouse gas emissions and the financial reporting of climate change risks are prompting the market to reduce greenhouse gas emissions. Modern directors have to be aware of such risks through their duty of care, skill and diligence or even in extreme circumstances the duty to act in the best interests of the company. Shareholder resolutions have reminded directors of their duties. Of course, to be effective at reducing greenhouse gases, corporate claims cannot be misrepresented. The next generation of greenwash of unsubstantiated carbon claims is upon consumers. With a well informed market the market has rewarded businesses which have created opportunities by reducing greenhouse gas emissions.

  1. Kathryn Douglass “Add One to the Arsenal: Corporate Securities Laws in the Fight to Slow Global Warming” (2009) 13 Lewis & Clark L Rev 1119 at 1120. []
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