Between 1964 and 1992, American
petroleum giant Texaco maintained drilling operations in Ecuador’s Amazon jungle
as a minority partner with Petroecuador, the state-owned oil company. In 1993, a
year after the partnership ended, lawyers representing numerous groups living in
the region where the drilling took place filed suit in U.S. District Court in
New York, claiming that Texaco had pumped billions of gallons of toxic waste
into the ecosystem. The complaint in Aguinda v. Texaco demanded that the
oil company clean up the pollution it had left in the Amazon, a task that some environmentalists estimated could cost as much as $6 billion at the time.
 | COFAN INDIAN elders from Ecuador lead demonstrators down a
street in San Ramon, Calif., on May 22, 2003, on their way to the world headquarters of ChevronTexaco to demand the cleanup of the contaminated
environment of the Cofans’ Amazonian homelands. (Photograph by Lou Dematteis.) |
After years of setbacks in U.S. courts, plaintiffs filed suit
again in May 2003, this time in Ecuadorian courts, where the case continues.
Though few expect that a ruling against the oil giant (which merged with Chevron
in 2001) would financially cripple the company or its investors, this case
has—for 14 years—been a public relations albatross hanging around the necks of
both companies. More importantly, perhaps, it offers a blueprint for aggrieved
populations, governments and policymakers who seek damages from global
corporations for polluting.
Because there is no statute of limitations in environmental
law, multinational companies and their investors face enormous, potentially
costly liabilities that will only continue to grow. As climate change issues
move to the fore of the world’s consciousness, companies will increasingly be
called to account (rightly or wrongly) for actions taken anywhere, at any time,
in the past. The impact on these companies—and their investors—could prove
devastating.
Most American investors might expect that a well-run company
need not worry about environmental liability issues because any overt polluting
the business might have done ended some time ago, and its board will have done
all it can to ensure that it now abides by a strict environmental code.
Unfortunately, this is not the case. A company can have the strictest corporate
social responsibility policy and look absolutely squeaky clean, but actually be
sitting on an unexploded minefield of historical environmental liabilities.
Miscreant subcontractors or expanding environmental legislation can also catch
almost any company unaware. Whatever the root cause, the potential liabilities
for many large companies can be enormous and the costs widespread. Aside from
tort liability expenses, firms face cleanup costs, fines levied by authorities
and ongoing public relations issues—as Chevron found in Ecuador—that could
ultimately diminish book value.
Governments are not the only source of potential concern for
investors. Environmental issues now top many political agendas, in part because
of pressure exerted by nongovernmental organizations that have become extremely
effective in their lobbying efforts with regard to pollution and climate change.
We can expect much more of this in the future. Just as labor and sweatshop
issues dominated public discourse in the 20th century, environmental topics will
dominate the 21st. Today, corporate environmental disasters do not require
catastrophic events like Bhopal or the Exxon Valdez. They just need the right
press release or a damning video clip streaming on YouTube.
Although the picture may seem bleak for investors, it doesn’t
have to be. As a result of the dramatically increased environmental liability
threat that global companies face, insurers now offer products specifically
tailored to protect a company’s bottom line. Before investing in firms with
potential liability, investors should examine, for example, the extent of a
particular company’s awareness of environmental impairment liability insurance.
Insurers can offer tailored solutions for multinational companies, including
coverage for the sort of gradual pollution exposures that many standard
liability policies simply exclude. Companies are increasingly purchasing this
type of coverage not just for themselves, but for their more global supply
chains as well.
Global Gadflies
Today, global companies are awakening to the legal realities of
environmental liability, although this issue is hardly new. It is rooted, in
part, in a substantial shift in public policy that began when President Richard
Nixon signed the Clean Air Act Extension in 1970 and the 1972 Federal Water
Pollution Control Amendments, which were later incorporated into the Clean Water
Act. Since then, legislation in this area has grown substantially as awareness
of the importance of environmental issues has increased.
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