With the huge impacts of Irma, Harvey and Maria, the Atlantic Hurricane Season got extensive media coverage[1] last year. Shanghai experienced an almost unbearable hottest day ever[2], while the forest fires season in Europe and California were devastating[3]. However, it was floods and massive landslide in Sierra Leone that were the deadliest natural events of 2017, claiming 1141 lives[4]. Extreme weather events are becoming more frequent (see image attached[5]) and their intensity is increasing. This is undoubtedly linked to human-induced climate change; whilst natural variability is still at play, climate change has shifted the odds and changed natural limits.
Figure 1 - Number of relevant natural loss events worldwide, 1980 - 2017. Extracted from Munich RE NatCat Service
Such extreme weather events bear a very high cost - beyond the cost to human life itself - the cost of Hurricane Harvey’s impact alone was around $85 billion[6]. For companies, these events usually mean loss of assets, business disruptions, inability to meet contractual obligations and involvement in further environmental damage. Fortunately for companies, a defence exists against these potentially devastating liabilities: to claim that such natural events constitute an act of God. So, what is an act of God? Although there is no single definition across legal doctrines and jurisdictions, there are variations on the following themes: (i) an extraordinary or abnormal occurrence; (ii) due to natural causes, directly and exclusively without human intervention; and (iii) which could not have been foreseen, or if foreseeable, could not reasonably have been prevented or guarded against. Whether a particular natural event and its effect constitutes an act of God is a question of fact which will depend on the circumstances and origination. This line of defence might not stand for much longer. With rapid scientific improvement in the understanding of such events and their increase due to climate change, the ability to foresee the frequency and damage of extreme events is increasing. Consequently, such events might no longer be recognized acts of God since their probability is further known, and their likelihood increases. This brings new liabilities for decision makers who are responsible for managing foreseeable harm. They are now responsible for taking adaptation actions to protect those to who they owe a duty of care, attempting to prevent or minimise the damage. A recent article[7] in Nature by Sophie Marjanac, Lindene Patton and James Thornton explains the legal argument as to why decision makers could be liable for breach of their duty of care. At Earth on Board, we are particularly interested in the consequences for boards of directors. As we know, directors have a duty to protect the long-term interest of the company, which includes the need to look at possible future harm. Does this mean that boards have to keep up-to-date with the latest science around the predictability of extreme events? Probably not. However, it is clearly part of their duty of care and diligence to make the effort a reasonable and prudent man would do under the same circumstances, which means acting on an informed basis after reasonable inquiry and deliberation. Following the Paris Agreement, boards can no longer claim they do not know the reality of climate change, nor that it is reasonable to ignore climate change consequences and the related increase of such events in frequency, intensity and pre-visibility[8]. They are responsible for including these considerations in the company’s risk assessment, to ensure the company discloses relevant knowledge on risks posed by climate change and then takes the necessary adaptive actions. But what adaptive actions can the board encourage? First, the company needs to make sure it is adequately insured. This does not only mean being covered for likely risks today, but ensuring the risks inherent to activities will still be insurable in the coming years. Then, boards must take the lead on building a resilient company; one that can reduce possible damage and recover swiftly from such events. Vulnerabilities that have been overlooked should be now considered and technically and economically corrected. By becoming resilient you can also seize the opportunity to outperform competition that has not taken the same precautions. Boards of Directors have a duty to act in the face of increased instances of extreme weather events that can no longer been classified as acts of God. As for the question will some companies one day be liable for being at the origin of such events? It is becoming clear that acts of God are partly acts of humans; linked to anthropogenic emissions. Some companies stand apart as being at the origin of those emissions. Legal cases are building and the bill could come sooner than some expect.
*** This blog originally appeared on BusinessGreen on 7 June 2018. The original link can be found here: https://www.businessgreen.com/bg/opinion/3033661/an-act-of-god-no-sir-an-act-of-man *** References
[1] http://time.com/4931586/irma-hurricane-season-climate-change/ [2] https://phys.org/news/2017-07-hottest-day-shanghai-china.html [3] http://www.euronews.com/2017/08/15/how-europe-s-wildfires-have-more-than-trebled-in-2017 [4] Number of relevant natural loss events worldwide, 1980 - 2017. Extracted from Munich RENatCat Service [5] https://www.aljazeera.com/blogs/africa/2018/02/day-mountain-fell-sierra-leone-mudslide-180221122154473.html [6] Sigma 1/2018:Natural catastrophes and man-made disasters in 2017: a year of record-breaking losses, Swiss Re Institute [7] Marjanac S., Patton L., Thornton J. (2017). Acts of God, human influence and litigation. Nature Geoscience. http://dx.doi.org/10.1038/ngeo3019 [8]The Article 8 of the Paris Agreement states: “Parties recognize the importance of averting, minimizing and addressing loss and damage associated with the adverse effects of climate change, includingextreme weather eventsand slow onset events, and the role of sustainable development in reducing the risk of loss and damage.”