Our key takeaway: Being a Board director today looks very different to being a director ten years ago. And this will look very different again in ten years time. Why? Climate transition will now need to be at the heart of corporate strategy for any company wanting to still be here in the future. What is the role of directors in this context? Understanding and tackling climate transition is not a nice-to-have for directors, it’s a must-have. To discharge their duties as fiduciaries of the company, directors must integrate climate risks and opportunities into their governance roles. They are increasingly subject to disclosure regulation as well as litigation - including against themselves individually as directors. Although the specific risks to directors differ depending on the jurisdiction, there are a number of actions that any forward-looking director would be well-advised in taking. This starts by asking the right questions of the board.
The Commonwealth Climate and Law Initiative (CCLI), with the Climate Governance Initiative (CGI), has released a Primer on Climate Change: Directors’ Duties and Disclosure Obligations (Second edition, July 2022):
- Serious implications for the duties of directors and officers: The primer delves into the “evolution of our understanding of climate change from an ethical or environmental issue to one that presents foreseeable financial and systemic risks (and opportunities) over short, medium and long-term investment horizons.” This evolution “has significantly changed [the] relevance [of climate change] to the governance of both corporations and investors” which “means there are serious implications for the duties of directors and officers, and potential disclosure obligations for companies.” The primer “provides an overview of contemporary evidence that climate change presents foreseeable, and in many cases material, financial and systemic risks that affect corporations and their investors.” The primer highlights how the new economic model of the COP21 Paris Agreement “requires a wholesale shift in how companies are governed: for board directors, it means placing the climate transition at the heart of corporate strategy, ensuring that board decision-making processes properly embed climate considerations, and that boards drive a marked cultural change across their organisations.”
- Applicable legal frameworks: When it comes to directors’ duties, “directors act as fiduciaries of the company in discharging their functions, and owe duties of loyalty and care and diligence to the company.” “The content of these duties varies as the factual context in which the directors act changes. A reasonable decision for a director fifty, ten or even five years ago might not look so reasonable today. Understanding these duties in the context of a changing external context is particularly relevant in the case of climate change, where the evidence of climate-related risks and opportunities is becoming ever more apparent, and changes in regulation are gathering momentum such that the likelihood of a disorderly and disruptive transition increases. To discharge their duties, therefore, directors must integrate climate risks and opportunities into their governance roles.” In addition to directors duties, the primer delves into disclosure obligations: “Climate risks are now understood by regulators and investors as being potentially material financial risks to a company, and therefore directors may need to consider whether they should be disclosed.” This is in addition to where disclosure is expected by governments and regulators (a growing phenomenon). Added to this, we are seeing growing litigation against companies (“Over 2,000 cases have been filed as of 31 May 2022, seeking to recoup some of the damage caused by climate change or the costs of adaptation, or to challenge governments’ or corporations’ actions or failure to act.”). Litigation is also starting against directors themselves, as evidenced by a recent lawsuit against Shell brought by ClientEarth. The primer delves into these developments in greater detail, on a country-by-country basis.
- Advice to directors: The primer offers some high-level questions to support directors, irrespective of which jurisdiction they are working in. These questions include: “Does my board actively consider the foreseeable and material financial risks to the company associated with climate change (including those risks arising across our value chain) and the potential impacts on corporate risk management and strategy?” “Do I meaningfully engage with and scrutinise information and advice concerning climate- related risks presented to the board? Do I need to seek independent advice?” “If climate change is never on the board agenda or in management reports, do I ask why not?” “Does my board consider climate risks, both in relation to general strategic planning and risk management, and in relation to specific projects or acquisitions that require board oversight or approval?” “Has my company embedded robust procedures to ensure that foreseeable and financially material climate risks are identified, dynamically managed, and appropriately reported to the board and in the financial statements and external reporting?” “Has the board considered whether to set a net-zero target by 2050 or sooner? If so, how will we ensure the target based on robust and credible plan to navigate the financial risks and opportunities as my company and the global economy transitions to net-zero emissions? How is this information communicated to our investors?” “Is my company’s capital expenditure aligned with our emissions reduction targets and/or a Paris-aligned 1.5°C scenario? If not, does management have a plan to do so?” “Have any of my company’s peers been subject to climate-related shareholder proposals for which the company received criticism from influential investors or the proxy advisors, or lower than expected votes on director or auditor appointment which was publicly attributed to dissatisfaction on climate issues? Have any of my company’s peers been subject to regulatory investigations or climate litigation?” “Do I have a sufficient level of knowledge on the physical, transition, liability, and systemic risks associated with climate change to fulfil my duties to govern the management of these risks? Does my board identify potential knowledge gaps among board members and organise appropriate training, and/or commission independent expert advice, to address them?”
