ClientEarth: How COP21 has changed the duties faced by company directors

Why failing to consider climate risks and opportunities is now inconsistent with a director’s duty

Just ahead of COP21, Geoffrey Lean, then environment editor of the Daily Telegraph, published a piece saying that the world had changed. Climate change scepticism is no longer tenable – politicians get it, and people get it.
He was right. The global outlook on climate change has shifted. But Paris still had to deliver a climate agreement to give shape to this new reality. And it did – in ways that few appreciate. Paris has profound implications not just for governments, but also for the business world.
If you are a company director, you may not understand what changed for you last December. Directors may know that the Paris agreement states that a peak in carbon emissions must be reached as soon as possible, followed by a downward course to net zero emissions in the second half of this century. But have they translated these implications into their company’s reporting, planning and investment strategies?
Paris has implications for investment banks with billions of pounds invested in carbon-intensive organisations across the globe. It has implications for pensioners with savings tied up in these carbon-intensive organisations. And it means the stakes have changed for the carbon-intensive organisations themselves.
It is clearer than ever that, for carbon-intensive organisations, climate change presents significant financial risks. Detailed analysis and disclosure of principal risks and uncertainties is already required by company law, and regulators can take action where companies fail to meet these disclosure obligations. Responsible boards of directors are already analysing climate risks and planning how their businesses will be adapted – but many are not.
In the UK, directors have a duty promote the success of the company and consider the likely long-term consequences of any decision. This duty is personally enforceable against directors – and failure to satisfy the duty means their own assets can be on the line.There is no longer any doubt that climate change poses material financial risks to many companies. Failure to give due weight to these risks could therefore amount to a breach of this duty. Paris changed the paradigm. We are now firmly on a course towards a low-carbon economy -even if some of the finer details have yet to be determined.

“Failure to give due weight to these risks could amount to a breach of duty”

Making the necessary shift away from business as usual will be challenging for companies which have to fundamentally rethink their business models. Business strategy will have to look very different going forward.

But the low-carbon transition brings with it a wealth of commercial opportunity in tackling the dual challenges of mitigation and adaptation. The International Energy Agency estimates that keeping temperature increases below 2°C will require investment in excess of $16 trillion by 2030.

Smart directors are likely to want a piece of this pie, and should seize this opportunity to innovate and diversify – if not, investors should challenge any failure to position the company well in the new normal.
It is crucial that governments, investors and industry leaders understand the business implications associated with climate change. Failing to consider climate risks and opportunities is inconsistent with a director’s duty to promote the success of the company. Post Paris, directors will find it increasingly hard to justify any lapses in this regard.

David Cooke is a Company and Financial Lawyer at ClientEarth.