Climate Risk: Enforcement of Corporate and Securities Law in Common Law Asia
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There is extensive literature on strategic climate litigation to combat environmental degradation and to address climate-related violations more broadly. However, the focus is mainly on lawsuits brought against private litigants or the state based on breaches of environmental law, tort law or human rights law in North America, the United Kingdom and Europe, and to a lesser extent in the Global South. Relatively far less has been written about corporate and securities litigation against companies or their directors, let alone in relation to Asia. This post, which is based on our paper recently published in the Journal of Corporate Law Studies, critically examines whether and how the enforcement of corporate law and securities law can be used as a tool to address climate-related risks in three leading common law jurisdictions in Asia—India, Singapore, and Hong Kong. These three jurisdictions are chosen not only because of their similarities (they are common law jurisdictions, they are leading market economies, and the regulators there have taken concerted measures to address climate risks), but also because of their differences (these jurisdictions exhibit varying competence and independence in their rule-making and adjudicatory institutions, which have a bearing on the effective enforcement of laws).
Climate Risk and Corporate Law (Directors’ Duties)
To begin with, it is a trite fact that climate change poses three types of risks: physical, transition and liability, which have a material and foreseeable impact on the financial performance of companies. The governments and regulators in Singapore, Hong Kong and India have not only acknowledged the physical and transition risks of climate change, but they have also proposed or implemented various measures to address them. For example, the regulators in Singapore and Hong Kong have either urged or required the relevant sectors to disclose climate-related risks based on the recommendations of the Task Force on Climate-related Financial Disclosures (‘TCFD’). Moreover, financial institutions are required to disclose the extent to which their intermediary activities and investments are aligned with the goals of the Paris Agreement. The Reserve Bank of India has said that it would integrate climate-related risks into financial stability monitoring.
Regarding liability risks, other than lawsuits brought against governments for breaches of tort law, public law and human rights law, there are two main categories of lawsuits brought against companies, one relating to companies’ contribution to climate change, and the other pertaining to companies’ failure to disclose climate-related risks. While no lawsuits seem to have been brought against directors in companies in the three Asian jurisdictions yet, directors must be very mindful of such litigation risks in light of the increased litigation in other parts of the world. The threat of litigation can also result in reputational damage to the companies and directors.
But before even considering whether lawsuits can be brought (namely, the question of enforcement), the issue is whether the existing directorial duties under the corporate laws of the three Asian jurisdictions—specifically the duty to act in good faith in the company’s best interests and the duty to exercise reasonable care, skill and diligence—require directors of private and listed companies to take into account climate-related risks. The answer, in our view, is in the affirmative. That said, the precise scope of directors’ obligations (such as what it means to consider climate-related risks) and what sort of directorial actions or omissions will trigger liability in the context of climate risk, will vary among the jurisdictions and the types of companies and the industries to which they belong.
Climate Risk and Securities Law (Disclosures)
Disclosure under securities law forms an important tool by which companies are increasingly compelled to address climate risk. Not only are regulations in individual jurisdictions requiring companies to report on climate risk and how they plan to address it, but there has been a growing trend of lawsuits filed against companies for misreporting on climate matters. Even though no such suits for climate-related mis-disclosures have yet succeeded, they draw attention to the issue of climate reporting, and provide a clear indication that the use of securities law to incentivise companies and their directors to address climate risk is only expected to intensify in the near future. Although the authors are not aware of any climate disclosure-related enforcement proceedings in Hong Kong, India or Singapore, the mounting regulatory attention that companies are facing due to climate-risk suggests that securities law actions may be round the corner.
Supplementing individual legal actions are global developments to modernise and standardise climate risk disclosures. The most notable effort in this regard is the release in 2017 of the recommendations by the TCFD on financial risk disclosure of climate-related matters. Apart from several companies having voluntarily adopted the TCFD recommendations, a host of jurisdictions around the world is contemplating requiring companies they regulate to report climate-related matters using TCFD standards. Similarly, the IFRS Foundation has proposed measures on sustainability reporting, which recognises a ‘climate-first’ approach, as climate change ‘is a financial risk of growing importance to investors and prudential regulators, mostly because of public policy initiatives by major jurisdictions globally.’ All of these measures elevate climate-related disclosures to the level of a key reporting measure by companies. These international efforts, coupled with pressure from the investor community, have already triggered more robust and standardised disclosures regarding climate risk. This is true of the legal position and market trend in Hong Kong, India, and Singapore as well.
Public versus Private Enforcement
Available evidence regarding the use of enforcement mechanisms under corporate and securities law in Hong Kong, Singapore and India suggests that their utility and outcomes are consistent with the theoretical framework in that public enforcement has been more prevalent and effective than private enforcement. Hence, a possible transplantation of the US-style private enforcement is bound to fail. Interestingly, the void created by the absence of private enforcement has been filled by a functional substitute, which is that in public enforcement actions the regulators tend to use their powers (either general or specific) to award compensation to investors who have suffered losses arising from corporate disclosure violations.
While the substantive corporate law surrounding directors’ duties to consider climate risk in Hong Kong, Singapore and India is robust, the accompanying enforcement mechanisms do not quite square up. The absence of private enforcement in securities law too is clearly visible. Prevalent studies in Hong Kong, Singapore and India do not evidence the existence of any significant investor claim for breaches of securities laws, such as corporate disclosure rules. Given these findings, it is difficult to be sanguine about the use of private enforcement mechanisms to deal with climate risk.
Public enforcement of securities law, though, stands on an altogether different footing. Securities regulators in the three Asian jurisdictions are steadfast in their efforts to introduce specific climate-related disclosures. This would not only enhance the substantive law in the field, but equip the securities regulators to implement more targeted enforcement measures. They can utilise the disclosure norms to alter the conduct of corporate actors such as directors and managers of companies in dealing with the risks of climate change. This is particularly beneficial since one of the principal goals of public enforcement is deterrence. At the same time, emerging law and practice indicates that the increased use by securities regulators of compensation orders and disgorgement measures as part of enforcement strategies could either directly or indirectly provide recompense to victims of mis-disclosures on climate matters.
Public enforcement mechanisms are more likely to be effective in addressing climate-related wrongdoing in relation to companies in common law Asia, in particular for breaches of directors’ duties and disclosure violations. Private enforcement mechanisms are likely to be of limited utility in these circumstances. That said, private enforcement mechanisms are not altogether irrelevant. They could become useful in serious cases where shareholders may have the necessary incentives to bring such actions, and the egregious nature of such cases may help them overcome the substantive and procedural hurdles in assuaging climate-related concerns using corporate and securities law and their enforcement measures. While the pursuit of securities law-oriented public enforcement is expected to be the norm, forms of private enforcement are likely to constitute exceptions.
Ernest Lim is Professor of Law at the National University of Singapore.
Umakanth Varottil is Associate Professor of Law at the National University of Singapore.
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