Pressure mounting on directors to consider climate risk

Following our webinar on directors' duties and liabilities around climate risk, we summarize some of the most recent developments in this space.

Half a year has passed since the release of the TCFD recommendations, and pressure is beginning to mount on directors to swiftly get their heads around them and the concept of climate risk. The authority of the TCFD, combined with the weight of the Paris Agreement, as well as wider legal opinion, has planted the issue firmly on the doorstep of corporate executives globally.

Markets are already shifting towards a low-carbon economy, with 'the weight of money' driving this shift. Innovation and reputation are increasingly contributing to this transition, and there is considerable risk looming for companies which fail to keep up with it.

Only last week, France and Sweden publicly endorsed the TCFD recommendations, with the latter announcing that it is working on a similar version of the French Article 173, to take disclosure of climate information forward.

In addition to this, over the past few months, we have seen several developments in this space indicating a real wind-change. We explored some of these during our webinar on directors’ duties and liabilities around climate risk, in which a detailed analysis of the current situation in Australia and the UK was undertaken.

The UK already places great emphasis on climate risk disclosure within annual reports, in line with the recommendations, though only a handful of companies and pension funds are obligated to do this under current legislation. Failure to adequately disclose financial risks that are material, including climate risk, may be considered a breach of duty under sections 172 and 174 of the Companies Act 2006, and it would be reasonable to expect financially material climate-related information to be disclosed in the strategic report, which certain companies are required to publish, where it contributes to a far review of the business.

Further, the government has recently endorsed the recommendations, with the Department for Business, Energy and Industrial Strategy establishing a ‘Green Finance Task Force’ to cooperate with industry in accelerating the growth of green finance in order to meet the UK’s carbon reduction targets.

In Australia we saw the world's first litigation case regarding climate risk take place earlier this year, with the Commonwealth Bank of Australia being challenged in court over their disclosure practices. While the case was ultimately dropped by the pursuants, it was certainly a warning shot across the bows for Commonwealth and other banks that should not be lightly dismissed.

Down under we have also seen two major position speeches by the Australian Prudential Regulation Authority's Geoff Summerhayes, who has been one of the early movers amongst financial regulators, declaring "some climate risks are distinctly ‘financial’ in nature. Many of these risks are foreseeable, material and actionable now," early in the year. This was followed up by another in November which emphasized the "commercial imperatives" that are contributing to the transition to a low-carbon economy. APRA have since revealed that is has begun asking companies about their actions to assess climate risk, noting that it would be more demanding in the future.

This lines up with the findings in CDSB's updated research paper on mandatory climate disclosure in G20 countries, suggesting that the recommendations are likely to be adopted at least at policy level in several of the world’s largest economies.

In Canada, for instance, the Canadian Securities Administrators are supporting the Canadian government in considering how to implement the recommendations, backed by considerable support and interest from provincial-level Finance and Environment ministers. Regulators are facing calls to endorse the recommendations, while there are demands that both the Toronto Stock Exchange and Venture Exchange reference them in their reporting guidance.

In China, seven major regulatory agencies including the People’s Bank of China recently declared their intention to improve existing sustainability reporting regulation, while in Germany, the government is assessing the feasibility of regulation on sustainability disclosure requirements for the financial actors, similar to those in Article 173.

Beyond states and regulators, both of the world’s largest ratings agencies are getting in on the act, with S&P Global investigating carbon efficiency and ‘stranded asset’ risk across major global markets, and Moody’s threatening to downgrade cities and regions ratings if they fail to address climate risk, while global asset management giant BlackRock is actively calling on companies to disclose in line with recommendations.

These developments are evidence that the momentum for effective climate disclosure has grown exponentially over the course of 2017, and with the likes of oil giant Exxon Mobil announcing its intention to disclose on climate risk, we look forward to seeing more companies taking disclosure forward and responding to the pressure that is being brought to bear by the variety of actors and stakeholders in this arena.