Directors urged to integrate climate risks and opportunities into their governance roles.
Company directors are under increasing risk of climate-related litigation partly due to the increased willingness of activist and others to use legislation to hold firms to account for their climate impacts and policies, according to a recent publication on board members’ legal obligations.
Noting that the number of court cases being brought against companies on climate-related grounds has recently topped 2,000, the report says some plaintiffs are seeking to recover the costs of climate change itself, or the expense caused by having to adapt to it. Others are bringing legal challenges to the actions, or absence of them, of companies and governments.
Regardless of motivation, the cases brought against corporates have the potential to cause reputational and financial damage not just to firms but also their investors.
The report cites a global total of 2002 cases, brought by May 2021, according to the Climate Change Laws of the World (CCLW) database, maintained by the London School of Economics’ Grantham Research Institute on Climate Change and the Environment, supplemented by the United States Climate Litigation Database.
According to the UNEP Global Climate Litigation Report, more than 1,500 cases had been filed in 38 countries by July 2020. The number of cases is widely recognised as having doubled since 2015.
The report was published by the Climate Governance Initiative and the Commonwealth Climate and Law Initiative; the former establishes a global network of non-executive directors to promote climate governance and the latter looks at the climate-related responsibilities of directors and trustees.
These two bodies have published an updated edition of their ‘Primer on Climate Change: Directors’ Duties and Disclosure Obligations’, which provides “an overview of contemporary evidence that that climate change presents foreseeable, and in many cases material, financial and systemic risks that affect corporations and their investors”.
Across most jurisdictions, they said, directors usually act as fiduciaries of the company “and owe duties of loyalty and care and diligence to the company”. But the nature of these duties changes over time, they added, and what would have been an unexceptional, even praiseworthy, decision 50 or even five years ago may not be so today.
“Understanding these duties in a changing external context is particularly relevant in the case of climate change,” they stated, “where the evidence of climate-related risks and opportunities is becoming ever-more apparent.”
Resort to the courts
Properly to carry out their duties, “directors must integrate climate risks and opportunities into their governance roles”. As part of this, given that directors are generally required to disclose to investors any material risks facing the company, and given that climate risks are increasingly seen by investors and regulators as falling into this category, “directors may need to consider whether they should be disclosed”.
The primer also highlights a risk to business from the avalanche of new climate-related regulation and the possible implications for the transition to a low-carbon economy. “Changes in regulation are gathering momentum such that the likelihood of a disorderly and disruptive transition increases.”
Increasingly, many who are dis-satisfied with progress in this area are turning to law, using new legislation and regulations and legally-binding commitments signed by governments. Unthinkable a few years ago, “litigation challenging companies’ contributions to climate change is becoming a reality in many countries”.
Vital role of non-execs
The primer added: “Challenges to the actions – and inactions – of companies and their directors are starting to emerge,” citing the judgment in the Netherlands on May 26 2021, ordering Royal Dutch Shell reduce its CO2 emissions by 45% from 2019 levels by the end of 2030.”
Nor is it only companies as corporate entities that face possible lawsuits. “Where directors fail to meet the standards of good governance, they may be exposed to litigation risks themselves.”
The primer noted the intention of the environmental NGO ClientEarth to lodge a claim against the board of Shell under Section 172 of the Companies Act of 2006. In this, ClientEarth alleges Shell “has failed in its duties to act in the best interests of the of the company and to act with due scare, skill and diligence by failing to develop and implement a climate strategy that aligns with the Paris Agreement goals, increasing its risk of stranded assets and having to make write-downs (due to both physical and transition risks)”.
Peter Swabey, Policy and Research Director at the Chartered Governance Institute, said the emphasis on engaging with non-executive directors was an “enormously important part of the approach”. Such directors ought not to be managing the companies, he said, but “sticking their noses in” to hold the executive to account and ensure appropriate climate policies were in place.
