Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Monday, July 8, 2019

Mulholland, Barker, Williams & Eccles on Climate Risk

Ellie Mulholland, Sarah Barker, Cynthia A. Williams and Robert G. Eccles have posted Climate Change and Directors' Duties: Closing the Gap Between Legal Obligation and Enforcement Practice on SSRN with the following abstract:

Until relatively recently, climate change was the purview of corporate social responsibility departments, to the extent it was considered at all. Siloed from finance teams, senior management and the board, it was seen as a non-financial, ethical and purely environmental matter. A public position on climate was beneficial for reputational purposes only, with conventional wisdom that climate change could not affect the financial bottom line, let alone lead to circumstances sufficient to impose personal liabilities on directors or senior management.

Yet this is no longer the case. Having reached global consensus in the Paris Agreement to keep the increase in global average temperature to ‘well below’ 2°C and to pursue efforts to limit it to 1.5°C, the world’s governments and private sector leaders are taking steps to deliver the required mitigation and adaptation measures. Advances in our understanding of the potential catastrophic impacts of climate change were brought to the fore in 2018 with the special report on the impacts of global warming of 1.5°C by the Intergovernmental Panel on Climate Change.

In light of these and other developments, it is now widely understood that the impacts of climate change pose foreseeable, and often material, risks to the financial performance and prospects of companies. Some of the most devastating of these impacts will be felt beyond mainstream investment and business time horizons. The extent of these impacts on future generations are dependent on the near-term actions of our current generation, which we have little incentive to fix, making climate change a ‘tragedy of the horizon’. Yet many of the risks will arise within mainstream planning and investment horizons and are already materialising today: 2017 had the highest ever costs from global weather disasters, with almost two-thirds of the US$320 billion loss uninsured. Climate change is beginning to visibly disrupt business models across a range of sectors and geographies.

This paper outlines why climate change is now a core corporate governance issue. Directors now need to add a base level of climate competency to their governance skill set, as is necessary to guide their companies through the physical impacts of climate change and the transition to the net-zero emissions economy set out in the goals of the Paris Agreement. And for most, if not all, directors climate competence is not optional; governance failures and misleading disclosures relating to climate change may be actionable against individuals and companies. Focusing on key common law jurisdictions, this paper shows that existing corporate and securities laws are conceptually capable of being applied to failures to govern and disclose climate risk. While there is generally a gap between the law on the books and its enforcement against directors, this paper argues that the climate change litigation gap is likely to close in the relatively near future. This has led to the development of a number of tools to assist boards and their committees to navigate the new governance and disclosure expectations and to take up the opportunities created by climate disruption on business.

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