We’ve had an embarrassment of riches this past week when it comes to CR (and PR!) catastrophes – Facebook’s dirty tricks campaign against Google, the Girl Scouts’ mishandling of debate over unsustainable palm oil in their cookies, the Yes Men’s brilliant ‘Coal Cares’ spoof website (LOVE the Justin Bieber-themed inhaler!) and Peabody’s pitiable threatening response – but a report released into liabilities faced by Chevron for historical pollution in Ecuador is of an altogether different and more substantial nature. It calls into question just how well informed investors and others really are when it comes to the environmental and social impacts of the company’s behavior.

The report, An analysis of the financial and operational risks to Chevron Corporation from Aguinda v. ChevronTexaco, written by Simon Billenness and Sanford Lewis, two corporate-responsibility and shareholder-activism veterans, outlines the company’s recent maneuvering with respect to a lawsuit filed by local communities and indigenous peoples in the Ecuadorean rainforest. The lawsuit alleges significant and systematic pollution from the company’s operations (historically Texaco) from the early 1960s through the early 1990s. The lawsuit stems from 1993, and the Ecuadorean courts issued a final judgment in February of this year – a judgment of a staggering $18 billion in fines and punitive damages.

As you would no doubt expect, it’s all rather complicated, with Chevron alleging a lack of due process and collusion between prosecutor and judge, not to mention the responsibilities shared among the other corporate partners (including state-owned Petroecuador) involved in the oil consortium. (See last month’s post about risks in the ever-complex oil and gas contracting chain.) The judgment remains under appeal in Ecuador, and the outcome unclear.

But what’s fascinating about this case, as the report argues, is that there is a significant body of information in the public domain that shareholders should consider enlightening with respect to any risks they face from the case, the company’s strategy, and the ultimate resolution or settlement. While the company’s 10K report made no mention of liabilities from the case until 2009 – 16 years after it was filed – it does now. There are also sworn representations and testimony of company officials in the court records. The report’s authors reviewed these materials and offer some insights worth mulling carefully:

1)   There are risks stemming from the company’s legal strategy. While the case was originally filed in the New York courts, Texaco succeeded in having it dismissed, on the condition that the company would submit to its being heard in Ecuador, and would recognize the validity of the Ecuadorean court’s judgment. Chevron is now arguing again before the US District Court that it should not be subject to the Ecuadorean legal system for the reasons stated above, even though the plaintiffs had objected to transferring the case to Ecuador in the first place, on similar grounds. In the meantime, the company has been granted a preliminary injunction in the United States blocking the plaintiffs’ ability to seize or attach the company’s US assets in enforcement of the court judgment.

The problem with this notion is that it doesn’t protect any of the company’s non-US assets from facing seizure or attachment, including its operations in Venezuela, Argentina, Brazil and Colombia, all of which have signed up to the Organization of American States’ Inter-American Convention on Extraterritorial Validity of Foreign Judgments and Arbitral Awards. This treaty requires signatories to recognize one another’s court judgments, and it is entirely plausible to think they would do so in this case. Indeed, the company’s original insistence on having the case heard in Ecuador and not the US, over the plaintiffs’ objections, only to have them argue they weren’t happy with the standard of justice they received, may not go over too well with other Latin American countries. This caper smacks of bad faith, which may damage the company’s ability to compete for future business in such countries.

And of course, it is not at all clear how the US District Court can prevent plaintiffs of a foreign country from seeking judicial relief in foreign courts, thus calling into question the robustness of the preliminary injunction that currently stands. I’m no lawyer, but this seems like a stretch to me.

2)   There are risks to the company’s stock price from the case and its resolution. $18 billion is a great deal of money (just ask BP’s shareholders). While Chevron’s SEC filings have argued that it’s impossible for them to know what, if any, damages might accrue from this case, analysts have been happy to give it a go. Stock research company Trefis issued a report in March into the case, suggesting very significant damage to the company, even assuming none of the punitive damages are paid: “Given the substantial $9.5 billion potential payout [in fines], this appears to be the biggest environmental battle ever fought by an oil company.” Trefis estimates the cash loss would translate to a 5% drop in equity value.

Again, this only takes account of the cash loss associated with the court judgment, and not other risks to the company’s business, bringing us to…

3)   There are risks to the company’s operations and future success quite apart from damages in the case itself. These risks have been acknowledged in open court, but have not been specified or estimated for shareholders. Chevron Deputy Comptroller Rex Mitchell testified before US District Court that attempts to enforce the Ecuadorean judgment, through, for example, “the seizure of Chevron assets, such as oil tankers, wells or pipelines…would disrupt Chevron’s supply chain and operations and seizures in multiple jurisdictions would be more disruptive.” Mitchell went on to characterize the fallout from this eventuality as: “irreparable injury to Chevron’s business reputation and business relationships that would not be remediable by money damages.”

Well again, I’m no expert in the specifics of Chevron’s business operations, but this sounds rather serious to me. The judge found it serious, too, and quoted this testimony in his decision to grant the preliminary injunction against enforcement of the judgment.

Under the circumstances, you would think Chevron shareholders would be entitled to know a bit more about just what such “irreparable damage” might amount to, where it might derive from, and how it would affect their company’s operations and ability to compete. Incidentally, the company’s sustainability report isn’t any help on this, as it declines to provide the relevant information under the GRI Guidelines, notably item 1.2 Description of key impacts, risks and opportunities; and the Disclosures on Management Approach related to economic and environmental areas. It is also not obvious how the company has applied the recommended guidance on determining materiality of report information provided in the IPIECA industry voluntary guidelines. Here’s hoping they give this some real consideration this year.

Lastly, and as a side note, I did wonder how a band of poor Ecuadorean communities and marginalized indigenous groups could have managed to sustain this legal challenge against such a powerful company for so many years. Billenness and Lewis enlightened me on this as well: it seems the plaintiffs have investors. Burford Capital – a Guernsey-based fund that invests in commercial claims and disputes – along with an online gaming entrepreneur have put up funds enabling the plaintiffs to hire some pretty hotshot lawyers. With the $18 billion judgment in hand, they will be able to raise even more funds if required. Unlike so many cases in history in which a plaintiff is simply outspent by its rich, well-connected adversary, this one is unlikely to go away soon.

Surely this is some sort of an indicator in its own right – that we are now at the stage where an environmental claim brought by poor people in a developing country stands such a good chance of success as to be considered investable in its own right? This feels like new territory in sustainability, a journey that could be transformative all by itself.