New primer examines how climate change is affecting board director legal duties around the world
Disclosure obligations are driving climate-conscious behaviour by board directors, as climate change shifts their legal duties to shareholders, said a new legal primer from the Commonwealth Climate and Law Initiative (CCLI) and the Climate Governance Initiative (CGI).
The cross-jurisdictional review, looking at the impact of climate change on business and its implications on directors’ duties, examines 20 countries and the European Union. The primer highlights shared principles and notable variations among the various civil and common-law systems.
With climate change so widely recognized as presenting material risk to business and a threat to the stability of the global financial system, the duties of loyalty, care and due diligence require board directors to approach their legal responsibilities with climate change in mind, said the primer. The “business judgment rule” and its equivalents will not excuse failure to incorporate climate risk into company policy, it said.
Following a number of expert legal opinions on the issue, including a guide on the Canadian context by Carol Hansell, creating an informational resource accessible to non-lawyer directors was key to shifting understanding and culture among boards, says Karina Litvack, non-executive director and chair of the CGI.
“In the context of building this organization, I kept bumping up against – particularly in United States – directors who would say, ‘I'm not doing this. I'll be sued if I do this. I'll be sued by our shareholders, because my obligation is to my shareholders and I cannot leave profitable business on the table,’” she says.
But in connecting with Ellie Mulholland, director of the CCLI and one of the contributors to the Primer, Litvack discovered this was an “erroneous interpretation of the law.”
“Even though the risks of liability might differ between different jurisdictions… There’s a remarkable amount of consistency,” says Mulholland. “When you connect the dots, it is a matter of directors’ duty in all these different jurisdictions.”
“Corporate governance laws, these directors’ duties to act in the best interests of the company, to promote the success of the company, to act with due care, skill and diligence – they are general principles,” she says. “They are standards that evolve with market norms, with evidence of what are the risks and opportunities that are affecting companies; where's the disruption, where are the compliance risks.”
The CCLI looked at climate science, the disruption a warming world would mean for business and investments and how policy, regulatory and market responses in the transition to a net-zero economy would re-evaluate directors’ duties.
In the jurisdictions studied, there is an increasing prevalence of disclosure obligations, say Litvack and Mulholland.
One example is the European Union’s Non-Financial Reporting Directive, which went into effect in 2017. The EU takes an “extremely comprehensive and prescriptive approach” to disclosure on sustainability issues, says Litvack. In Italy, board directors are personally liable for up to €50,000, for any error and omissions. “That really concentrates the minds in the boardroom,” she says.
With many jurisdictions lacking legislation explicitly compelling business actors to do something on climate change, disclosure obligations drive climate-friendly behaviour, says Litvack. To comply, companies must introduce data collection systems to track management information. Board directors do not want this data to tell shareholders that they are sub-par among peers, she says.
“The interesting takeaway from the European legislation is that even though they didn't prescribe behaviour, by prescribing disclosure, they effectively drive behaviour,” says Litvack.
The primer adds that “[m]ere compliance with disclosure rules will not suffice if not accompanied by change in practices.” How directors fulfilled their duties will be evaluated according to a standard of care, defined by what a “responsible director” would do “to safeguard his or her company over the long term.”
Also shaping the standard of care is scientific advice and investor expectations.
“With every new investor that comes onto the scene and demands new things, that raises the bar on what is considered to be the standard of responsible behaviour for a director,” says Litvack.
The primer also found that climate-related litigation is “rising rapidly” and “testing the boundaries” of acceptable business practice.
“Wise directors will not wait to be challenged in court – they will understand that proper fulfilment of their duties means demonstrating the robustness of their actions and governance processes,” said the primer.
The primer also found that, while some jurisdictions are more climate-conscious in the way of laws, regulations and their interpretation, every one is moving in that direction.
The CGI is partnered with the World Economic Forum in the promotion and implementation of its principles of best practice for boards and their directors with respect to climate.