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 has significantly changed its relevance to the governance of both corporations and investors. This evolution means there are serious implications for the duties of directors and officers, and potential disclosure obligations for companies.
This second edition of the Primer on Climate Change: Directors’ Duties and Disclosure Obligations 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. It then discusses:
1) general climate obligations in the jurisdictions where The Climate Governance Initiative is present though its global network of national Chapters;
2) how company law and directors’ duties in these jurisdictions require directors to incorporate climate change into their strategies, legal oversight, and supervision of the companies entrusted to their care;
3) disclosure obligations; and
4) advice to directors.
While legal frameworks vary between jurisdictions, it is generally the case that 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.
Similarly, directors are generally subject to duties to disclose material risks facing the company to the company’s investors. 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. Additionally, regulatory measures requiring disclosure of climate and other sustainabilityrelated risks are increasingly being put in place by governments and regulators.
Litigation challenging companies’ contributions to climate change is becoming a reality in many countries. 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. Challenges to the actions—and inactions—of companies and their directors are starting to emerge, evidenced in stark form by the judgment in the Netherlands on 26 May 2021, ordering Royal Dutch Shell to reduce its CO2 emissions by 45% from 2019 levels by the end of 2030.
Where directors fail to meet the standards of good governance, they may be exposed to litigation risks themselves. In the UK, an environmental NGO, ClientEarth, has begun the process to bring a claim against the board of Shell, alleging that the board has failed in its duties to act in the best interests of the company and to act with due care, 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).
We have produced this Primer for board directors so they can be informed and prudent advocates, encouraging their boards to integrate the issue of climate change issues in the development of their companies’ corporate strategy, risk management oversight, governance and disclosure. This, alone, is the most effective thing directors can do to fulfil their obligations to their companies while steering well clear of any personal liability exposure from the potential increase of litigation.
