Commonwealth company directors must take action on climate risk: new legal reports

New legal analysis shows that company directors in four Commonwealth countries must take action to address material climate risk, or face legal and reputational risk.

The four national reports, covering Commonwealth nations Australia, Canada, South Africa and the UK, should galvanise company directors who have previously been cautious to make strides in the clean energy transition.

Published by the Commonwealth Climate and Law Initiative (CCLI), as the Commonwealth Heads of Government prepare to meet in London, the reports explain how directors could be held personally liable for failing to assess, manage and report climate risk, where it poses a foreseeable and material financial risk to the company.

Between them, Australia, Canada, South Africa and the UK account for a quarter of global pension assets. Their stock exchanges account for a third of the world’s listed fossil fuel assets and they are home to more than 10% of the world’s oil and coal reserves.

Ben Caldecott, Director of the Oxford Sustainable Finance Programme at the University of Oxford said: “These four Commonwealth countries are heavily exposed to the risk of fossil fuel assets becoming stranded due to advances in policy and technology. They also face significant risks from physical climate change impacts, such as more regular and severe droughts, heatwaves, storms, and floods. Company directors and fiduciaries in these countries are therefore heavily exposed to climate risk and it is now clear through our research that there are significant potential liabilities associated with misreporting climate risk, mismanaging climate risk, and directly contributing to anthropogenic climate change.”

Directors’ duties are designed to respond to evolving business norms and market dynamics, meaning that recent developments in climate risk awareness will inform courts’ views on how a reasonable director would act - redefining the boundary between legally acceptable and unacceptable conduct.

ClientEarth lawyer Alice Garton said: “Despite it becoming an accepted norm that climate change may present financial risks to companies, some directors remain reluctant to embrace climate risk analysis and disclosure. This may be because of a misconstrued fear of liability for forward-looking climate risk disclosures, or a misconception that considering ‘environmental’ issues such as climate change conflicts with prioritising the company’s financial success.

“These reports show that the law is no barrier to considering climate risk - in fact it requires this of directors where that risk is material and foreseeable. And the current trajectory suggests that directors will be held to ever more stringent standards in relation to their assessment and management of climate risk. As a director, your duties are to present and future shareholders.”

This research also has implications for other market participants - Garton urged financial regulators, along with insurers, auditors and investors, to consider what the reports mean for them in their own sphere of responsibility.

Nigel Brook, a partner at international law firm Clyde & Co, chaired a panel discussion at the launch event yesterday evening. He said: “These reports underline directors’ potential exposure to climate change-related lawsuits, and the implications for insurers. They also indicate how directors can take positive steps to minimise that exposure.”

Commonwealth countries share very similar legal frameworks and rulings made in one nation can influence the others.

Garton added: “It only needs one case, in one jurisdiction, and we are likely to see a domino effect of litigation.”

CCLI is a research, education, and outreach project focused on four Commonwealth countries: Australia, Canada, South Africa, and the United Kingdom. The experts are examining the legal basis for directors and trustees to take account of physical climate change risk and societal responses to climate change under existing laws.

Alice Garton is an Australian-qualified lawyer.