A climate of risk

It is some 30 years since climate change was first seriously discussed by world leaders. In a speech at the Royal Society in 1988¹, Margaret Thatcher acknowledged that changes in population, agriculture and use of fossil fuels might ‘have unwittingly begun a massive experiment with the system of this
planet itself’.

At the second world climate conference in Geneva in 1990², she explicitly called for precautionary action in response to changes in the atmosphere. And, later that decade, the Kyoto conference agreed on  measures to reduce carbon emissions.

But, as we all know, global carbon dioxide levels continue to rise, with growing evidence of changes to the global climate. The Conference of the Parties in Paris in 2015 made further commitments to reduce global emissions, but average global temperatures continue to rise, and extreme events also appear to be occurring with increasing frequency.

As well as considering the impact on our communities, wider national society and globally, we need to consider the potential impact of climate change on our businesses. And this is not just something for casual consideration. There is a growing argument that directors have a statutory duty to pay attention to the potential risks that climate change might pose to their businesses.

This recently had considerable attention from senior lawyers and business leaders in Australia. Last October, the Australian Centre for Policy Development (CPD) – an independent, non-partisan and evidence-based policy institute, working in conjunction with the Future Business Council – ran a roundtable on climate risks and directors’ duties. This featured senior leaders from the Australian fund management community, along with senior lawyers.

To prepare for this event, the CPD commissioned legal opinion on the extent to which Australian corporate law permits (and indeed requires) directors to consider climate change when making decisions about strategy, performance and risk disclosure. Key findings suggest that:

• Climate change-related risks would be regarded as foreseeable by courts, and so are relevant to a director’s duty of care and diligence, where those risks might affect the interests of the company
• Where climate change-related risks are – or may be – material to the interests of the company, directors
  are not legally restricted from taking into account climate change and related
  economic, environmental and social
  sustainability risks
• Company directors may – and, in some cases, should – consider the impact of climate change-related risks on their businesses
• Directors who fail to address climate change-related risk now could be found liable for breaching their duty of care and diligence in the future.

The opinion was prepared by Noel Hutley, Special Counsel, who said that ‘it is likely to be only a matter of time before we see litigation against a director who has failed to perceive, disclose or take steps in relation to a foreseeable climate-related risk that can be demonstrated to have caused harm to a company.’

This shows that directors should be considering climate change-related and other relevant environmental, social and governance issues that might influence the long-term performance of companies, a view supported by the roundtable.

The discussion is not confined to the antipodes. This summer, ClientEarth³, the UK environmental lawyers who have twice won court judgements against the UK government on air quality, complained to the UK’s Financial Reporting Council (FRC) on the omission of climate risk reporting from the annual reports of two oil and gas companies: SOCO International PLC and Cairn Energy PLC. Commenting on the Australian roundtable, Alice Garton, senior lawyer at ClientEarth, said: ‘This is the latest clear example of the growing consensus around the duties of company directors to adequately assess and disclose the risk to their business posed by climate change.’

Directors should assess and report on climate-related risks to investors. If they are more mindful that future emissions reduction regulation may affect their business, they should seek advice. And, given the contribution of the built environment to global emissions, this is an opportunity for many readers who need to be on hand as directors wake up to this duty. Otherwise, we can be certain that others will be.

References:

1. See Speech to the Royal Society. The speech is worth reviewing, not only for the environmental aspects towards the end, but also for the comments on scientific research funding earlier.
2. See Speech at 2nd World Climate Conference.
3. ClientEarth is part of the Commonwealth Climate and Law Initiative (CCLI), focused on Australia, Canada, South Africa and the UK. The CCLI is examining the current laws in place in these countries and what they mean for company directors.

• Dr Hywel Davies is technical director at CIBSE