Directors' Duties and Climate Change
Updated: Jul 26, 2021
CGM Primer on Climate Governance “Directors’ Duties and Climate Change” on 22 July 2021, in collaboration with the Bar Council of Malaysia.
Session highlights contributed by Sunita Rajakumar.
Responses to questions asked by the audience will be updated on this blog post shortly.
It is clear the nature of climate change has evolved from being an environmental concern to one that presents material financial risks - and opportunities.
We are seeing increasing changes in weather patterns, leading to unexpected storms, floods and extreme heat days from the Dandenong Range in Australia to villages in Germany and China to wildfires in the United States and of course, droughts in Africa.
Businesses are significant emitters of greenhouse gas emissions and allocators of capital are demanding for more disclosure so they can make informed decisions: about where capital will flow, about the quality of board and management, whether they are capable of making the transition which the world urgently needs.
Directors, as long-term stewards entrusted by the owners of the company, have a duty of due care and diligence to anticipate and manage clearly foreseeable financial risks arising from the climate crisis, whether physical or transition risks.
In addition, legal counsel have an inherent tension in their roles as both partner to the business, shepherding deals across the finish line, and as a guardian where the board of directors depends on their counsel to avoid incurring foreseeable liability.
Read the lightly-edited transcript of this speech here:
The keynote speaker YBhg. Tan Sri Richard Malanjum has been advocating environmental protection for at least 15 years and during his tenure as Chief Justice, was instrumental in proposing a change to the Rules of Court which would have allowed individuals, NGOs and even animals to bring causes of action against polluters.
He reminded us it is our responsibility to engage with companies – law is not only punitive in nature but there is also restorative justice. The current personal liability of directors under the Environmental Quality Act 1974 is confined to pollution and does not cover deforestation, mining.
It is timely to re-look laws and revamp the approach for environmental governance to include public interest litigation via civil litigation (instead of merely relying on criminal prosecution), as this would provide a means to uphold environmental justice. Our national trajectory could include legislative changes, to include the widening of locus standi as in the Philippines where much broader categories of people can bring a cause of action in the courts to prevent pollution or any activity that might damage the environment. Invite companies to help.
He also observed that more open discussions amongst directors was needed, as it was only through awareness that matters will improve. If directors are aware they could be subject to legal suits, they will be more careful.
Finally, he suggested that companies might want to contribute to a fund to support the legal costs of such claims to protect the environment.
EcoLawgy, University Malaya’s moot-competition winners, law undergraduates shared their views with us, including the following thoughts:
-Change will come, are you the one initiating it or the one resisting change? History has proven that those who refuse to change will not survive. Be part of the change that we all need to create a better future for all of us.
-Directors share equal, if not more, responsibility in effecting change.
-We are living on this earth as if we have another earth, whereas in reality, we are holding it on trust for the future generation.
-We all need to start taking responsibility and leave it in a better state.
-Change must happen from the top and directors are leaders of this change.
We then segued smoothly to the panel discussion where views shared by the contributors included:
To’ Puan Janet Looi who gave us a comprehensive overview of directors duties to act in the best interests of the company and that acting with reasonable care skill and diligence is a subjective and objective test. When can the business judgement rule be a defence?
She reminded us that when a company commits an offence under the Environmental Qquality Act 1974, s43 of the EQA imposes personal liability on the directors and managers too of of the guilty company if systems are not in place to prevent the occurrence of the offence (egdischarging environmentally hazardous substances into inland waters]. There is also the recent precedent of Australian teenagers who sued on the basis of the principles of the tort of negligence to ensure their environment is protected.
Directors were reminded that they might need to attract financiers to fund their projects and such risks would need to be addressed.
How to approach the perceived conflict of financial return versus other priorities? The temperature is rising with investors and shareholders are agitating, including MSWG locally. If boards are not acting on an evident risk, the inevitable question will arise of whether they are acting in best interests of the company.
She suggested that the duty of board members included inviting experts to continuously advise on identification of the specific climate risks for their companies in order for directors to work action steps for dealing with such risks when deliberating on how the strategic plans for the future will evolve.
As for practising lawyers, the ability and capacity to look around the corner is highly pertinent now, not just with litigation but with the impending Climate Change Act, to expect increasing liabilities. Also, although not expressed in s.213 Companies Act 2016 as is the case with the UK Companies Act, common law principles already requires directors take into account other considerations such as impact on the environment when directors make decisions on what is in the best interests of the company.
Bursa disclosure requirements are only going to go further in that direction, directors should aim to build in risk and thence, a plan to mitigate, all while ensure no misrepresentation in reporting.
She concluded by saying that companies are the opportunity for salvation, if they are able to lead the path for a better future, which will also help the business and environment.
Karina Litvack shared her personal experience as a director wondering if acting would be in breach of her legal obligation by leaving profits “on the table”. A situation where she would be consistent with scientific consensus but ahead of political consensus.
This was previously debated in relation to pension funds, which had previously interpreted their duties narrowly to maximise financial returns at all costs, but was successfully challenged in the early 2000s with legal views that this objective needed to be widened to take account of long-term drivers and stakeholder concerns.
Directors were of the view that they ought not take action on climate change, and if challenged to cite the business judgement rule, claiming that had assessed the situation and exercised their expert judgement. At best, the might elect to act, again citing the business judgement rule to justify potentially compromising short-term profits.
The major innovation of the CCLI legal primer [which covered 20 jurisdictions plus EU27] is that it clearly concludes that acting on the climate is in fact a “must do”, not a “may do”, given the bow widely-accepted view that climate risk is financial risk, and addressing this falls squarely within directors’ duties of care, skill and diligence .
For those considering just complying with the laws, typically climate disclosure regulations, the Primer reveals that compliance is only a starting point. Disclosure will often reveal information that raises serious substantive questions about what companies ought to be doing, spotlighting a gap between what is disclosed and what needs to be done to make the company resilient.
Legislators cannot prescribe behaviours but can prescribe disclosure, and through that disclosure, will directors will find they are obligate to take action to remedy the deficiencies and risks that emerge from enhanced reporting. Directors in the boardroom have the power and responsibility to act, but often lack the awareness and skills. They need help from senior lawyers and it is incumbent on directors who don’t have sufficient knowledge, to seek proper advice because investors who can clearly see the damage to their portfolios are not waiting for legislation.
She viewed the turning point as happening in January 2020 with BlackRock with USD9 trillion assets under management setting the pace for the market, then further upping the ante in January 2021. Now, climate resilience is routinely raised by investors, particularly companies that are the largest emitters, or those that face the highest physical risks from extreme weather events and changing weather patterns. Few companies will be spared, so it belongs on every board agenda.
When a sector is downgraded, it becomes harder to raise funding. Karina’s oil & gas company has responded by issuing bonds that explicitly tie returns to climate transition outcomes, with investors thereby betting on a successful transition strategy.
She reminded the audience of businesses which were very complacent and don’t exist any more. That customers of an oil & gas company are buying light, power, heat, cooling and mobility, which another supplier could and will provide in a manner which is completely clean.
Consider how your business portfolio is designed for the future and how it has incorporated climate-related assumptions into your risk management framework.Capital allocation decisions at a company which has announced a transformation must likewise reflect this shift, because investors are watching: if 99% of the capex in the budget is still in old lines of business, how serious is your company about meeting its climate transition targets?
She called on in-house counsel to be climate-literate and to consider carefully how this affected their advice. Just as anti-corruption protections need to be a standard clause in contracts, ensure that climate risks are reflected in terms and conditions.
Karina concluded by reminding us that disclosure is not an end, but an incredibly powerful means of getting people to change behaviour. Her main piece of advice to directors was: Have the courage to see things differently and resist the urge to keep quiet, steel yourself and speak up.
Their stimulating conversation was skilfully moderated by Kiu Jia Yaw, committed advocate for sustainable development, who serves on the Bar Council Environment and Climate Change Committee, who noted that regulators have done a lot to lead the way, not imposing or mandating but trying to facilitate an easy transition by focusing on best practices and capacity building.
The session was then summed up with a challenge: will we be remembered as being on the right side of climate history?
Change arises because we have the ability to discern what could be better and we have the skills to effect that change. I would argue that every single person in this room has that ability and capacity to make a significant difference.
We are faced with an opportunity, not just of our lifetime or our generation, but in all likelihood, as the last generation to be able to change the trajectory the world is currently on.
We don’t have much time and, as the keynote speaker Tan Sri Richard suggested, why not invite everyone to help us manage this challenge? Why not allow individuals and NGOs to be able to bring causes of action if there is irreversible degradation of the environment and biodiversity?
When responsible and conscientious directors accurately anticipate the direction of travel, we too can be a force for good and guide the business to longer range value-accreting measures such as embedding sustainability into the very DNA of the business.
Finally, a special thank you to the Bar Council especially the Bar Council President and Chairman of the Bar Council’s Environment and CC Committee for this collaboration on the important topic of “Directors’ Duties and Climate Change”.
Note: The views expressed above are views of the speakers in their personal capacity, not representative of the views of their respective organisations, and are not intended to be relied upon as legal advice.
For all attendees, please give us your feedback here: https://docs.google.com/forms/d/e/1FAIpQLSfPQcJbEc5YFPfOOwuPgQeeoTFg2D8mskAXIQ37lI77s2tRGg/viewform
Watch the full recording of the session here.
This session builds on the earlier CGM session held on 30 June 2021, where CGM hosted the Asia Pacific launch of the "Primer on climate change - Directors’ duties and disclosure" in collaboration with the Commonwealth Climate and Law Institute. Read the highlights of this event here, with a link to the recording: https://www.cgmalaysia.com/post/primer-on-climate-change-directors-duties-…
Excellent webinar. I liked that the discussion preferred depth over breadth of the topic, whilst remaining concise.
Great compact and informative contents for first timers on a glimpse on how directors of companies can be pushed to take into account of climate impacts while upholding the best judgment rule in making decisions for companies.
It's been a great lecture given by the speakers and definitely worth the time spent! Thank you again for the overtime great work!
Knowledgeable to the audience from keynote and experienced speakers, very informative and mentioned well on the current issues.
Love the points brought up by the young mooters with a passion to discuss climate change and social responsibility.
Very remarkable speakers and inputs.
Event details are available online here: https://www.cgmalaysia.com/event-details/directors-duties-and-climate-change