Business Law and the Transition to a Net Zero Carbon Economy – A Conference Report (Part 3)

The final session was devoted to how climate change should be handled at the level of the board of directors. The session was moderated by Professor Luh Luh Lan (National University of Singapore and ECGI) who started the discussion by framing the primary question: how effective are corporate and securities laws in shaping corporate behaviour regarding climate change?

Third Session. Climate Change in the Boardroom

5. Green Boardrooms?

The discussion began with the presentation by Professor Brett McDonnell (University of Minnesota Law School) of the paper ‘Green Boardrooms?’ co-authored with Hari Osofsky, Jacqueline Peel, and Anita Foerster. The premise of the paper is to draw attention to the corporate and securities law tools available in Australia and the US respectively to induce companies to better manage climate-related risks, namely disclosure shareholder engagement and fiduciary duties. The paper highlights the outcomes of interviews with corporate governance representatives and investors regarding the effectiveness of these tools.

Disclosure appears to be a universal tool, as it may be used by investors, employees and consumers alike. The paper shows that in both the US and Australia, mandatory climate-related disclosures are currently insufficient. Moreover, as noted by the interviewees, overly voluminous and varying disclosure standards are presently implemented. Thus, it is suggested that a unified standard would make the disclosure framework more effective. Although the quality of disclosure has improved, none of the interviewees were able to conclude that disclosure brought significant changes into companies’ lives.

The second tool is shareholder engagement, mainly through the submission of shareholder proposals. According to respondents, a range of shareholder proposals, including those relating to director nominations, disclosure proposals, and tying directors’ compensation to the achievement of climate change targets, may potentially change a company’s behaviour. The interviews showed that shareholder engagement (both formal, through proposals, and informal, through private meetings) grew, but its effects have been limited. Australia has a longer history of informal shareholder engagement than the US and can showcase recent examples of successful formal engagement, while in the US Rule 14a-8 under the Securities Exchange Act introduced limits on shareholder proposals, making it easier for companies to filter out proposals.

Fiduciary duties, and in particular litigation for breach of fiduciary duties pertaining to addressing climate change risks, represent the third tool in enabling more effective management of climate-related risks. The likelihood of success for plaintiffs from such litigation, however, remains small and, as the interviews showed, company management remained uncertain as to what such duties require from them in relation to climate change concerns.

Professor McDonnell concluded that these tools cannot replace environmental regulation. That said, the interviews suggest that strong reforms of corporate and securities law are possible and may include a shareholder value reform and a focus on stakeholder rather than shareholder value. Other ideas included the introduction of a list of suggested shareholder proposals to better align ESG objectives and a duty to avoid environmental harm.

Discussing the paper, Professor Martin Gelter (Fordham University School of Law and ECGI) argued that the focus on stakeholders rather than shareholders must be carefully considered, as the stakeholders’ interests are neither necessarily homogenous nor aligned with environmental goals. He also suggested that an increase in the complexity of board structures (for instance, following the appointment of environmentalists as directors) would complicate the decision-making process. From this standpoint, the introduction of advisory boards may be a better solution for large companies. He also pointed out the importance of corporate law and shareholder litigation, which can shape the scope of managerial discretion and how it is exercised. However, he further noted that the bargaining power of certain stakeholder groups may be a more important factor.

6. Panel Discussion

The discussion of directors’ duties as a potential mechanism to align companies’ behaviour with a net-zero target continued in the panel discussion.

Sarah Barker (Minter Ellison) presented the Australian context of fiduciary duties in relation to climate change risks. In Australia, extraction as well as commodity industries, which are exposed to the risk of stranded assets, play a significant role. Climate change is a highly politicised issue (an example being the introduction and subsequent repeal of the carbon tax law) and there is no stable political leadership regarding climate change regulation. Nevertheless, the country is in the process of acknowledging not only a positive obligation to consider climate change in the discharging of directors’ duties of care and diligence, but also an obligation to consider the achievement of net zero goals. This was confirmed in an influential series of legal opinions provided by a high-profile, senior lawyer in 2016, 2019 and 2021 in Australia—the most recent stating that if a director in high risk industries does not consider how the achievement of those goals affects the company’s strategy and business, they are likely to breach their duties of care and diligence.

Professor Ernest Lim (National University of Singapore) summarised the legal position on climate change from Singapore, referring to the Singapore Legal Opinion and the experience of Temasek Holdings (Private) Limited—Singapore’s largest controlling shareholder of state-owned enterprises. According to the Legal Opinion, directors should take into consideration climate change risks in their decision-making process. Failure to do so may entail directors’ liability for breach of their duties. The Legal Opinion further states that it is impossible for the director to claim that the consideration of climate change is unnecessary. In addition, disclosures under the Singapore listing rules may include information pertaining to climate issues.

Finally, Professor Lim stressed that in concentrated ownership countries like Singapore (where controlling shareholders ultimately decide on a company’s strategy and where large companies are often controlled by the state or families), the state plays a decisive role in setting rules for combating climate change, and it is important to hold the state accountable for both its actions and lack thereof.

Ellie Mulholland (Commonwealth Climate and Law Initiative) discussed UK directors’ duties most relevant to climate change. She referred to two obligations under the UK Companies Act: the duty to promote the success of the company for the benefit of its members as a whole (a fiduciary duty), and the duty to exercise reasonable care, skill and diligence. As follows from the understanding of climate change as a financial risk issue, as evidenced by the Bank of England PRA report, climate change risks should be considered in the fulfilment of both duties. Although there is no public enforcement of directors’ duties and there are procedural hurdles in the UK for shareholders suits, some recent developments heighten the standards of directors’ care: (i) TCFD disclosures requiring directors to sign off on disclosure reports are mandatory across the UK and will be extended; (ii) educational materials on how IFRS accounting standards apply to climate issues were issued by the International Financial Reporting Standards Foundation; (iii) a net zero carbon target is now set in the statutes so that companies operating in the UK should consider it; (iv) escalating regulatory and shareholders expectations encourage directors to have regard to net-zero scenario; (v) climate litigation (including the recent landmark ruling against Shell) have urged courts to acknowledge significant impact of emission reduction on companies’ strategies and plans. Citing a speech by UK Supreme Court Justice Lord Sales, the panellist suggested that directors must take into account climate change in their decision-making and ‘accord significant weight’ to it or even to strive to reduce emissions.

The panel concluded that the main problem in changing corporate behaviour in furtherance of achieving net zero goals is not the absence of duties and corresponding rights (thus, the legal basis for directors’ duties may go beyond company law to, for example, human rights legislation etc) but their enforcement. The question, therefore, is whether private means of enforcement may compensate for the absence of public enforcement. Another problem discussed by participants is the lack of ‘attribution’ and ‘causation’ links between environmental harm and failure to discharge duties, which is the main reason why litigation related to climate change damages usually fails.    

Gabriel Acuna Csillag is an Advisor on Sustainable Finance at the Financial Markets Commission of Chile, and Founder and Former President of the Oxford Sustainable Finance Students’ Society.

Stepanyda Badovska is an Associate at Baker & McKenzie - CIS, Limited, and Founder and Former Vice President of the Oxford Sustainable Finance Students’ Society.

This is the final part of this post. Click here for Part 1 and here for Part 2 of the post.

This post is part of the series ‘Business Law and the Transition to a Net Zero Carbon Economy’. This series consists mainly of posts summarizing papers presented and presentations made at the 5th Annual Oxford Business Law Blog conference on ‘Business Law and the Transition to a Net Zero Carbon Economy’ which took place online on 25 to 27 May 2021. The recordings are available here.