The management of climate-related risks is, or should be, high on the c-suite agenda. In addition to civil litigation against organisations that fall short in terms of their handling and disclosure of climate risks, we are seeing a growing trend towards the directors and officers (D&Os) of these corporations being held to account for mismanagement or failure to undertake their duties to stakeholders effectively.
High profile examples include:
- 2017-2018 Pacific Gas & Electric’s leadership faced a lawsuit for failing to adequately assess and mitigate the risks posed by climate change, specifically extreme weather events.
- 2019 The company and executives of ExxonMobil faced a lawsuit for misleading investors about how the financial risks posed by climate change regulations impacted the business.
- The infamous ‘Dieselgate’ scandal led to significant legal actions against Volkswagen and its executives for misrepresenting the environmental impact of its diesel vehicles.
- 2023 ClientEarth filed a lawsuit against the directors of Shell for failing to manage climate transition risks effectively, thereby exposing the company to financial risks, and breaching their legal duty to promote the success of the company for shareholders.
Why are D&Os facing increasing legal scrutiny?
There are several reasons for the current heightened scrutiny of D&O actions/inactions when it comes to climate risk management.
Firstly, increased regulatory efforts by governments and regulatory bodies across the world aimed at placing more responsibility on organisations, and their senior leaderships, to address, act on, and disclose the climate impact of their operations.
In the UK we’ve recently seen the introduction of the Financial Conduct Authority’s (FCA) new Anti-Greenwashing rules which form part of a package of wider measures finalised under the Sustainability Disclosure Requirements (SDR). Similarly, the Digital Markets, Competition and Consumers Act has now passed into law giving the Competition and Markets Authority greater powers to impose significant monetary penalties on organisations when it comes to greenwashing. As a result, we are seeing an increase in D&O litigation and regulatory fines.
Secondly, D&O’s are being held to account by their shareholders, customers, and the wider public for their role in managing and mitigating climate risks. In particular, we’re seeing increased claims by shareholders for breaches of fiduciary duties, and failures by D&Os to act in their best interests by ignoring, mismanaging or mis-reporting climate-related risks and their financial impact.
Finally, risk mitigation is an increasingly key consideration. As the risks from climate change grow exponentially every year – extreme weather events, supply chain disruption, and impacts on human rights to name just a few – organisations and their D&Os are increasingly being judged on their ability to prepare and mitigate the risks to their operations, shareholders and customers. This is evident with the UK’s Greenhouse Gas Protocols, which compels businesses to increase the pace of environmental, social and governance (ESG) change in order to reach net zero targets by 2050 and protect the future of our planet. D&Os can find themselves on the end of costly litigation if they do not act in ways that demonstrate preparedness in terms of protecting assets, financial performance, stakeholders, reputation, and market competitiveness.
How can organisations and their D&Os protect themselves against climate litigation?
Robust policies and corporate governance are vital. This ensure that D&Os are identifying and mitigating climate related risks and integrating ESG considerations into decision making across every aspect of their organisation’s operations.
This is not just about tick box regulatory compliance and the prevention of fines and litigation, nor is it simply about reducing the risk of personal liability for climate risk mismanagement. Fundamentally, it’s about building resilience against climate risks and playing a positive role in protecting the future of our planet and its inhabitants.
In doing so, D&Os can foster greater levels of customer loyalty, boost brand dominance, increase shareholder confidence, attract investment, and future proof their business to thrive in a greener, more socially conscious economy.
What does best practice climate governance look like?
- Leadership and accountability: D&Os must be explicitly responsible for managing climate (and other ESG) risks and incorporating a range of considerations into business strategy. This could include bringing in specialist expertise at C-suite level, establishing ESG committees to formulate and execute relevant policies and procedures, and delivering training at every level of the organisation.
- Management and mitigation: D&Os must integrate ESG considerations into every aspect of their business operations via a systemic approach to risk identification and the deployment of a clear corporate risk framework with measurable KPIs and targets
- Transparency: D&Os must engage in meaningful dialogue with all stakeholders on climate and wider ESG issues, as well as comply with all relevant disclosure and other regulatory requirements. Going a step further they could also seek external independent validation and verification for their initiatives.
- Risk Management: D&Os must conduct regular climate related risks assessments on operations, supply chains, financial performance, shareholder and customer protection, environmental and human rights impacts. And incorporate learnings into policies and procedures as part of a demonstrable and measurable continuous improvement strategy.
- Regulatory compliance: D&Os should seek to comply with all relevant ESG and related regulations, laws, and protocols across all areas and jurisdictions of their operations, as well as all reporting and disclosure requirements.
- Continuous improvement: D&O’s must regularly review strategies, frameworks, policies and procedures in order to stay ahead of emerging risks, customer and shareholder expectations, and evolving regulatory requirements.
How can Leverets help D&Os meet their climate responsibilities?
Leverets can offer a wide range of support to organisations and their D&Os:
- Guidance on building robust corporate governance procedures
- Regulatory and legal compliance
- Support with disclosure and reporting
- Legal representation and dispute resolution
Our team of barristers and solicitors has a deep understanding of the integral nature of ESG issues for your business and its future success can add significant value, keeping you in line with legislative and disclosure requirements and protecting D&Os from climate litigation.
