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Corporate directors have a legal obligation to address the risks and opportunities that climate change poses to the companies on whose board they serve, a corporate governance expert says in a new study.

“Directors should recognize that the courts, regulators and investors accept that climate change poses real risks,” veteran lawyer Carol Hansell wrote in a 25-page legal opinion released on June 25.

“They expect that management teams and boards are alert to those risks and opportunities, and are reflecting their assessment of that risk in their strategic thinking and risk management practices.”

Hansell is one of Canada’s top experts on corporate governance. In addition to her distinguished legal career, she has served on corporate boards, and as fellow with the Institute of Corporate Directors and adviser to the Corporate Laws Committee of the American Bar Association.

In her analysis, she states unequivocally that corporate directors have a duty to assess the degree to which climate change will impact a company over the long-term, not just its short-term profits or business plans. They must also ensure that, where risks and opportunities are material to the firm’s business, management must come up with strategies to address them.

Hansell prepared the legal opinion for the Canadian Climate Law Initiative, which is housed at University of British Columbia Allard School of Law and York University’s Osgoode Hall Law School. It is the first in-depth legal analysis of directors’ duties in a corporate governance context by a senior Canadian lawyer.

It comes as the global business community is focusing more closely on the climate crisis and its impacts, both in terms of physical impacts, such as extreme weather, drought and flooding, as well as government policy response and technological changes.

The Bank of England, for example, published its own climate-change disclosure report on June 18, in which it outlines how it will address the impact on the British economy and the financial institutions which it supervises.

“Climate change creates financial risks that are far-reaching in breadth and scope,” the Bank of England noted. “They will affect all agents in the economy and arise through two primary channels: the physical effects of climate change and the impact of changes associated with the transition to a net zero emissions economy.”

The Bank of Canada, the federal Office of the Superintendent of Financial Institutions and the Canadian Securities’ Administrator have all warned about the expected impact on the economy from climate change and efforts to reduce greenhouse gas emissions. Companies in the energy sector are particularly vulnerable, but impacts extend far beyond oil and gas and utilities sectors.

A federally-appointed expert panel on sustainable finance recommended last June that climate-change related risk and opportunity should be a mainstream concern among Canadian business managers and their boards. That panel was chaired by Tiff Macklem, who has since been named at Governor at the Bank of Canada.

Still, a recent report from the Chartered Professional Accountants of Canada and consulting firm Mantle314 show relatively few publicly-listed companies are meeting the standards for climate-related financial disclosure that have been laid down by international advisory groups.

In her legal brief, Hansell made it clear that boards that fail to address climate change risk potential legal liability. She said directors cannot let their personal beliefs about climate science impede their duty to the corporation.

“Canadian courts have accepted climate change and the risks it presents as self-evident and uncontroversial, as has the investment community,” she wrote. It would be nearly impossible for a director to dismiss climate change risk out of hand.”

Nor can directors dismiss the need for action in the belief that the climate crisis will not impact the immediate fortunes of the corporation. The Supreme Court of Canada has ruled that directors must look after the long-term interests of the business.

“The fiduciary duty of the directors to the corporation is a broad, contextual concept. It is not confined to short-term profit or share value. Where the corporation is an ongoing concern, [fiduciary duty] looks to the long-term interests of the corporation.”

Corporate directors have a duty to not only assess climate risk, but to ensure that assessment is clearly communicated to shareholders and investors. That disclosure should include the board’s role in climate-change management.

“Above all, understand that it remains the responsibility of the board to be satisfied that it is properly informed about the climate change risks facing the organization and the way in which those risks are being managed,” she concluded.

 

Shawn McCarthy writes on sustainable finance and climate for Corporate Knights. He is also senior counsel for Sussex Strategy Group.

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