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Primer on climate change

Directors’ duties and disclosure obligations.

type
Report
author
By Commonwealth Climate and Law Initiative, The Climate Governance Initiative
date
30 Jun 2021
read time
60 min to read
Windmills in landscape at dusk

A new legal Primer examines the fast-changing landscape of climate risks and opportunities for business, and the implications for board directors’ legal obligations. The Primer on Climate Change: Directors’ Duties and Disclosure Obligations, which examines 20 countries and the European Union, is the first-ever legal primer that takes a cross-jurisdictional view across such a broad sample of major civil law and common law systems. The Primer shines a spotlight on a set of core universal principles, as well as notable variations in breadth and stringency between the leading jurisdictions and the broader group.

The geographic scope of the Primer covers virtually all countries where the CGI has either well-established or prospective chapters. It covers ten civil law countries plus the EU: Brazil, Chile, France, Germany, Italy, Japan, Mexico, Russia, Switzerland, and Ukraine, along with ten common law jurisdictions: Australia, Canada, Hong Kong, India, Malaysia, New Zealand, Singapore, South Africa, U.K., and the U.S. 

Download primer on climate change

Key findings from the Primer

  • Climate change is now widely recognised as posing not only a material risk to business, but a major threat to the stability of the global financial system.
  • This fact alone, when overlaid against the traditional duty of loyalty and duty of care and diligence that have long underpinned director duties across all jurisdictions, means that directors must look at their legal duties through a fresh climate lens.  
  • Contrary to what many directors have long assumed, their legal duties to protect the interests of the corporation should not be seen as a barrier to taking action on the climate crisis, even if this may involve “leaving profitable business on the table”; on the contrary, their duties require them to be properly informed about climate change risks, and to make decisions accordingly.
  • Conversely, failure to incorporate climate risks cannot be excused by reference to such concepts as the business judgement rule (or its equivalent in various jurisdictions): no director, if challenged in court, will reasonably be able to argue that “nobody knew” how serious the climate threat was, or that they were not grossly negligent in failing to be informed of these risks.  The standard will be that directors “knew or should have known”.
  • Another key finding of the Primer is that rising standards of climate disclosure, whether enshrined in law or voluntary through such widely-recognised frameworks at the Task force on Climate-related Financial Disclosure, also have major implications for how director should understand their duties. Mere compliance with disclosure rules will not suffice if not accompanied by change in practices, because fulfilment of their duties will be judged against a standard of care that is defined in terms of what a “responsible director” would do, rather than report, to safeguard his or her company over the long term. 
  • This standard of care is influenced by a wide array of factors, including scientific advice and rising investor expectations regarding climate stewardship
  • The incidence of climate-related litigation has been rising rapidly, testing the boundaries of what had long been 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.
  • Finally, although some jurisdictions are clearly in the lead, eg the European Union, New Zealand and the UK, the Primer finds that these principles are broadly established in all the 20 jurisdictions it examined, plus the EU, and that laws, regulations and the interpretation they are being given are moving in one consistent direction.  
  • As a result, all directors must be aware of the changing dynamics affecting their legal duties, all must acquire the knowledge they need to fulfil them, and all must transparently demonstrate  they are taking appropriate action to protect their companies.
 
About the authors

The Commonwealth Climate and Law Initiative is a legal research and stakeholder engagement initiative founded by Oxford University Smith School of Enterprise and the Environment, ClientEarth and Accounting for Sustainability (A4S). The Commonwealth Climate and Law Initiative examines the legal basis for directors and trustees to manage and report on climate change-related risk and climate mitigation and our research is at the forefront of the intersection of climate and biodiversity risks under existing companies and securities laws. 

The Canada Climate Law Initiative is the Canadian partner of the Commonwealth Climate Law Initiative, an inter-disciplinary research initiative that advances the understanding of climate governance across Canada through research, dialogue and knowledge sharing. CCLI conducts rigorous legal analysis and consult with a national network of 66 Canadian Climate Governance Experts to bring up-to-date governance knowledge and tools to corporate and pension boards across Canada. See website for more information 

The Climate Governance Initiative (CGI) 
In 2019, the World Economic Forum unveiled the Principles for Effective Climate Governance, a comprehensive set of guidance principles that lay out best practice for boards and their directors in respect of the climate, and partnered with the Climate Governance Initiative (CGI) to facilitate their promotion and implementation. To this end, local CGI “Chapters” have been set up around the world to serve as a centre of expertise and a venue for directors to exchange with each other as well as with a wide range of subject matter experts, and access a range of specialist guidance materials and tools.  

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