Directors’ Duties Must be Viewed Through “Fresh Climate Lens”

Failure to consider climate cannot be excused, amid rising investor expectations and litigation risks.

Company directors’ legal duties to protect the interests of the corporation should not be seen as a barrier to acting on the climate crisis, even if this may involve “leaving profitable business on the table”, according to a new legal primer from the Commonwealth Climate and Law Initiative (CCLI) and the Climate Governance Initiative (CGI). The ‘Primer on Climate Change: Directors’ Duties and Disclosure Obligations’, advises that directors’ duties require them to be “properly informed about climate change risks” and to make decisions accordingly.

Given that climate change is now recognised as posing not only a material risk to businesses, but also a major threat to the stability of the global financial system, directors must look at their legal duties “through a fresh climate lens”, says the primer.

Failure to incorporate climate risks cannot be excused by reference to concepts such as the ‘business judgement rule’ or its equivalent. “…no director, if challenged in court, will reasonably be able to argue that ‘nobody knew’ how serious the climate threat was, or that they were not grossly negligent in failing to be informed of these risks. The standard will be that directors ‘knew or should have known’,” says the primer.

Karina Litvack, Chairman of the CGI, said making this information accessible to board directors, most of whom are not legally trained, was vital to enable a shift in understanding and culture. “Many directors labour under the misapprehension that their legal obligations may in fact preclude them from pursuing Paris-aligned climate policies. The Primer shows that this is simply not the case – in fact, quite the opposite,” she said.

A cross-jurisdictional view

The primer examines civil law and common law systems in 20 countries and the European Union, becoming the first legal primer to take a cross-jurisdictional view across such a broad sample of legal systems, say CCLI and CGI. It examines the performance of corporate directors in the different jurisdictions against the Principles for Effective Climate Governance. The primer found that these principles were broadly established in all 20 jurisdictions it examined, plus the EU, and that laws, regulations and the interpretation they are being given “are moving in one consistent direction”.

“As a now widely-recognised financial and systemic risk, as well as a factor that is integral to value creation, climate change squarely engages directors’ duties and disclosure obligations,” says the primer. “In line with these developments, financial regulators have increasingly insisted on effective climate risk disclosure and governance. So, too, investors have set normative expectations of director conduct and are becoming increasingly vocal in communicating these expectations in their voting and stewardship activities.”

Investor action

The primer points to investor action during the 2021 proxy season, during which a “marked acceleration” occurred in the way investors expected to hold companies accountable for their climate strategies. “In Europe, the US, Asia and Australia, this took the form of so-called Say On Climate (SOC) proposals, whereby investors tested the limits of local law by urging boards to put their climate transition plans to an annual advisory shareholder vote.” While many companies voluntarily did so, in other cases the focus fell on shareholder proposals demanding greater disclosure of greenhouse gas emissions and more ambitious and comprehensive target-setting.

One of the biggest surprises, said the primer, was at the ExxonMobil AGM, where strategic change on climate issues was forced upon one of the US’s largest companies.

Climate-related litigation

Separately, a study conducted by Sustainable Law Programme and Environmental Change Institute, University of Oxford, said existing obstacles to the success of climate-related lawsuits can be overcome with the use of recently-developed lines of scientific evidence. Assessing 73 lawsuits in 14 jurisdictions, it found evidence submitted by litigants lagged significantly behind climate science, impeding claims that greenhouse gas emissions had caused the impacts suffered by plaintiffs.

The findings stress the importance of attribution science, which can provide the kind of evidence that helps to prove causation, enabling lawyers to ascertain the prospects of successful litigation before cases reach court.

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