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Economy

Shareholders and their environmental liability

A group of European researchers say shareholders should be held liable for the environmental damage caused by the companies they invest in. But the suggestion does have its drawbacks.

Images of the 2010 Deepwater Horizon oil spill in the Gulf of Mexico are still locked in our collective consciousness. The burning well, the black underwater plumes, marine birds covered in a slick of oil: the images were so dramatic that it could have spelled the end for deep offshore drilling worldwide.

But, nearly three years on, the drills keep turning and BP, the company that ran the rig that exploded, is still very much in the oil business, despite paying a huge fine at the end of 2012. But, what if the company's shareholders, not just the corporation and its executives, had to pay for the damage caused by the spill?

Researchers at the International Institute for Applied Systems Analysis, a Vienna-based think-tank, say increasing shareholder liability could reduce interest in deepwater drilling and see faster growth in the development of renewables.

Minimizing environmental damage

"If you could be held liable for continuing to invest in a company which is actually causing some kind of damage, you may well reconsider your investments," Jerome Dangerman, who co-authored the study, suggested.

Crews work to clean up oil washed ashore at Pensacola Beach in Florida.
(ddp images/AP Photo/Michael Spooneybarger)

The damage to the environment around the Gulf of Mexico following the 2010 oil spill was considerable

The report was produced in collaboration with Germany's Potsdam Institute for Climate Impact Research. It shows that today's energy economy continues to earn big profits for shareholders investing in fossil fuel companies.

Dangerman said that, despite the fact that renewable energy technology has been around for more than four decades, big investors are still much more interested in fossil fuels.

The other side of the equation

At the Vienna Stock Exchange the attitude among traders is very different. Equity market analyst Aaron Alber agrees that shifting more liability to shareholders could move money from greenhouse gas industries into climate-friendly investments, but only if there's money to be made along the way.

"Investors still take profits from coal-fired plants and nuclear-powered plants," Alber told DW. "And we need these conventional power sources in order to improve and implement renewable power sources."

At the time of the BP oil spill, US Attorney General Eric Holder, said the company was responsible for a long list of legal breaches. The company has now paid a 4.5 billion dollar (3.4 billion euro) fine to the US government. But shareholders were not forced to dig into their own pockets.

BP America Chairman Lamar McKay (left) and Steven L. Newman, President and CEO of Transocean, at a hearing of the House Natural Resources Committee. (Photo by Brendan Smialowski/Getty Images)

Executives from BP and rig constructor Transocean were forced to pay out-of-court settlements and fines

Christian Keuschnigg is a capital markets expert and director of Vienna's Institute for Advanced Studies. He says making shareholders responsible for damages could actually stop innovation and economic growth.

"Corporations are created to protect shareholders, not losing more than the money that they invest in these companies, and that's a very important precondition for larger companies to get access to capital," Keuschnigg told DW. "If shareholders were directly liable, then corporations would not be created."

In most countries, shareholders can't be sued for the crimes of the company they invest in. But, Keuschnigg says, they can lose money. BP's shares have dropped 30 percent since the oil spill, for instance.

'Investing in renewables minimizes risk'

Jerome Dangerman argues that capital won't dry up if shareholders are held personally liable for mistakes committed by their investment portfolio. He says investors would simply put their money where damage, and its legal consequences, are least likely.

Traders on the floor of the New York Stock Exchange.
(Photo:Reuters/Brendan McDermid)

Could a shift to investment in renewables help these often struggling industries to finally get ahead?

"If it is clear that there is no environmental damage resulting from the operation of a company then there should be no risk involved in investing," Dangerman told DW.

The academics who've floated the idea of shareholder liability for environmental damage know there won't a major shift anytime soon. But they have tapped a well of concern about how to divert investor interest away from fossil fuels and into renewables.

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