Climate Governance Initiative Primer on Climate Change: Directors’ Duties and Disclosure Obligations In support of the Principles for Effective Climate Governance June 2021 In collaboration with In collaboration with Climate Governance Initiative Oxford Sustainable Finance Climate Governance Initiative Canada Climate Law Initiative Programme In collaboration with the World Peter A. Allard School of Law Smith School of Enterprise and the Economic Forum University of British Columbia Environment 1822 E Mall University of Oxford Email: Vancouver, BC South Parks Road [email protected] V6T 1Z1 Oxford, OX1 3QY Canada United Kingdom Email: [email protected] Email: [email protected] Cover photo: Jay Heike | Unsplash Back photo: Hayes Potter | Unsplash Primer on Climate Change: Directors’ Duties and Disclosure Obligations Executive Summary The evolution of our understanding of climate change from an ethical or environmental issue to one that presents foreseeable financial and systemic risks (and opportunities) over short, medium and long-term investment horizons has significantly changed its relevance to the governance of both corporations and investors. This evolution means there are serious implications for the duties of directors and officers, and potential disclosure obligations for companies. This Primer provides an overview of contemporary evidence that climate change presents foreseeable, and in many cases material, financial and systemic risks that affect corporations and their investors. It then discusses: (1) general climate obligations in the jurisdictions where The Climate Governance Initiative is present though its global network of national Chapters; (2) how company law and directors’ duties in these jurisdictions require directors to incorporate climate change into their strategies, legal oversight, and supervision of the companies entrusted to their care; (3) disclosure obligations; and then (4) advice to directors. Litigation challenging companies’ contributions to climate change is becoming a reality in many countries. Over fifteen hundred cases have been filed as of the end of 2020 to recoup some of the damage caused by climate change or the costs of adaptation, or to challenge governments’ or corporations’ actions or failure to act. Challenges to the actions—and inactions—of directors are starting to accumulate, evidenced in stark form by the judgment in the Netherlands on 26 May 2021, ordering Royal Dutch Shell to reduce its CO2 emissions by 45% from 2019 levels by the end of 2030. We have produced this Primer for board directors so they can be informed and prudent advocates, encouraging their boards to take up the issue of climate change in the development of their companies’ corporate strategy, oversight, and disclosure. This, alone, is the most effective thing directors can do to fulfil their obligation to their companies while steering well clear of any personal liability exposure from the potential increase of litigation. 1 Primer on Climate Change: Directors’ Duties and Disclosure Obligations Foreword Climate change poses an existential risk to humanity, the planet and the global economy on a scale never before seen. This is prompting governments and businesses around the world to take serious action to accelerate the transition to a new economic model that delivers on the commitments taken in the COP21 Paris Agreement signed in 2015. Doing so means recalibrating all economic activity to achieve net-zero greenhouse gas emissions by 2050 or earlier, consistent with an average temperature rise above the pre-industrial age of no more than 1.5°C. It also requires a wholesale shift in how companies are governed: for board directors, it means placing the climate transition at the heart of corporate strategy, ensuring that board decision-making processes properly embed climate considerations. However, despite this growing awareness of the scale and urgency of the climate crisis, few directors possess the specific interdisciplinary skills necessary to effect this wholesale change of culture and behaviour. It is for this very reason that the Climate Governance Initiative (CGI) came into being: 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. To facilitate their promotion and implementation, local CGI “Chapters” have been set up around the world to serve as centres of expertise and venues for directors to exchange with each other as well as with a wide range of subject matter experts. 2 Primer on Climate Change: Directors’ Duties and Disclosure Obligations The first of these eight CGI Principles, entitled “Climate accountability on boards”, concerns an issue that has frequently stood in the way of board directors factoring climate concerns into their decisions: how their legal duties and obligations apply in the context of the now-universal recognition of the extreme threat that climate change poses to the global economy and therefore to individual businesses. Too often, boards are concerned that “leaving profitable business on the table”, or acting according to “how we wish the world to be, rather than how it is” will place them in breach of their legal obligations to shareholders, or worse, result in litigation or removal. This Primer tackles precisely this issue, and provides a succinct, easily accessible summary that non-lawyers who serve on boards can readily understand and act on. It will serve as a valuable resource to the global network of CGI Chapters, and enable directors around the world to act in a fully-informed manner on their legal obligations as they confront this historic challenge. The Climate Governance Initiative currently has 14 active Chapters in Brazil, Brussels, Canada, Chile, France, Germany, Italy, Malaysia, the Nordic region, Poland, Russia, Switzerland, the United Kingdom and the United States. Additional Chapters in Australasia, Europe, Africa and Latin America are currently in formation, bringing the total to some 25 national and regional members by the end of 2021. Karina Litvack Chairman, Climate Governance Initiative 3 Primer on Climate Change: Directors’ Duties and Disclosure Obligations Table of Contents Executive Summary ................................................................................... 1 Foreword .................................................................................................... 2 Acknowledgments ...................................................................................... 5 CCLI and CGI ......................................................................................... 5 Contributors to the jurisdictional overviews............................................. 5 About the Climate Governance Initiative .................................................... 6 About the Commonwealth Climate and Law Initiative ................................ 6 About the Canada Climate Law Initiative ................................................... 6 Disclaimer .................................................................................................. 7 List of abbreviations ................................................................................... 8 1. Climate Change as a Financial and Systemic Risk .............................. 12 2. Directors' Duties and Climate Change ................................................. 18 3. Directors' Disclosure Obligations and Climate Change ........................ 19 4. Litigation ............................................................................................... 23 5. Questions to Assist Directors ............................................................... 26 6. Jurisdictional Overviews ....................................................................... 28 Australia ............................................................................................... 29 Brazil .................................................................................................... 34 Canada ................................................................................................. 39 Chile ..................................................................................................... 44 European Union .................................................................................... 47 France .................................................................................................. 56 Germany ............................................................................................... 60 Hong Kong............................................................................................ 65 India ...................................................................................................... 70 Italy ....................................................................................................... 74 Japan .................................................................................................... 76 Malaysia ............................................................................................... 82 Mexico .................................................................................................. 90 New Zealand ........................................................................................ 97 Russia ................................................................................................ 101 Singapore ..........................................................................................