Directors, fiduciary duties and climate change

In Directors’ Fiduciary Duties and Climate Change: Emerging Risks –  writing in the Harvard corporate governance blog – Cynthia A. Williams (York University), Sarah Barker (MinterEllison), and Alex Cooper (CCLI) state:

“The last few years have seen a significant change in the understanding of climate change as a material risk to all kinds of businesses, with government and capital markets responding. There has also been a notable increase in the number of so-called ‘Caremark’ claims against directors and officers for failing to exercise proper oversight surviving motions to dismiss. These two developments, construed together, indicate that directors and officers of Delaware corporations are navigating their corporations through an increasingly risky environment, and there is the potential that they may face litigation and ultimately personal liability for failing to manage these risks. Delaware directors and their attorneys must understand this new legal risk.”

Further, they note: oversight liability may arise where directors and officers: “fail to consider or oversee the implementation of climate-related legal risk controls; fail to monitor mission-critical regulatory compliance, either specific climate change-related regulations or existing regulations which require consideration or disclosure of climate change risks. This latter category is likely to include a broad range of regulations, but may include: securities laws, which require listed companies to disclose material risks; environmental laws, as the physical effects of climate change catalyze infrastructure failure; and health and safety laws for companies with employees are exposed to increasingly hostile conditions; or fail to monitor climate-related mission-critical operational and business risks…”

Also as published on McLeod Brock site, “while directors and officers are likely to be particularly focused on the risk that they may be found personally liable for a breach of their duties, proper compliance with fiduciary obligations requires acting to a higher standard. Given the defenses available to fiduciaries, and the difficulty in bringing claims for breach of fiduciary duty, a director or officer found to be liable for such a breach will generally have acted egregiously. The standard to which directors and officers must act to avoid liability is therefore a bare minimum. To minimize the risk of such claims being brought, directors and officers will need to act to a higher standard to avoid the attentions of litigious shareholders; and to further reduce their potential exposure, and to ensure proper compliance with their legal obligations, directors and officers should seek to follow best practices.”

Finally, I believe that  directors should consider commissioning  an independent assessment of the controls and other  parts of the climate change compliance program. Recognizing the need for help – particularly on something as complex and consequential as this – is  itself an important best practice.

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