Climate Governance Initiative

Executive Summary

3 August 2023

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The evolution of our understanding of climate change from an ethical or environmental issue to one that presents foreseeable financial and systemic risks (and opportunities) over short, medium and long-term investment horizons has significantly changed its relevance to the governance of both corporations and investors. This evolution means there are serious implications for the duties of directors and officers, and potential disclosure obligations for companies.

This third edition of the Primer on Climate Change: Directors’ Duties and Disclosure Obligations provides an overview of contemporary evidence that climate change presents foreseeable, and in many cases material, financial and systemic risks that affect corporations and their investors. It then discusses: 

  1. General climate obligations in the jurisdictions where The Climate Governance Initiative is present though its global network of national Chapters; 
  2. How company law and directors’ duties in these jurisdictions require directors to incorporate climate change into their strategies, legal oversight, and supervision of the companies entrusted to their care;
  3. Disclosure obligations; and 
  4. Advice to directors.

For the first time this edition also considers developments in some jurisdictions that may increase the relevance of biodiversity risk in the discharge of directors’ duties. (Further information can be found in the CCLI's report Biodiversity Risk: Legal Implications for Companies and their Directors and our briefing Biodiversity as a Material Financial Risk: What Board Directors Need to Know.)

While legal frameworks vary between jurisdictions, it is generally the case that directors act as fiduciaries of the company in discharging their functions, and owe duties of loyalty and care and diligence to the company. 

The content of these duties varies as the factual context in which the directors act changes. A reasonable decision for a director fifty, ten or even five years ago might not look so reasonable today. Understanding these duties in the context of a changing external context is particularly relevant in the case of climate change, where the evidence of climate-related risks and opportunities is becoming ever more apparent, and changes in regulation are gathering momentum such that the likelihood of a disorderly and disruptive transition increases. 

To discharge their duties, therefore, directors must integrate climate risks and opportunities into their governance roles. Similarly, directors are generally subject to duties to disclose material risks facing the company to the company’s investors. Climate risks are now understood by regulators and investors as being potentially material financial risks to a company, and therefore directors may need to consider whether they should be disclosed. Additionally, regulatory measures requiring disclosure of climate and other sustainability-related risks are increasingly being put in place by governments and regulators. 

Litigation challenging companies’ contributions to climate change is becoming a reality in many countries. Over 2,300 cases have been filed as of 29 June 2023, seeking to recoup some of the damage caused by climate change or the costs of adaptation, or to challenge governments’ or corporations’ actions or failure to act. The diversity of the types of claims, and the jurisdictions in which they are being brought, are increasing. Challenges to the actions—and inactions—of companies and their directors are starting to emerge, evidenced in stark form by the judgment in the Netherlands on 26 May 2021, ordering Royal Dutch Shell to reduce its CO2 emissions by 45% from 2019 levels by the end of 2030. 

Where directors fail to meet the standards of good governance, they may be exposed to litigation risks themselves. In the UK, an environmental NGO, ClientEarth, has brought a claim against the board of Shell plc, alleging that the board has failed in its duties to act in the best interests of the company and to act with due care, skill and diligence by failing to develop and implement a climate strategy that aligns with the Paris Agreement goals, increasing its risk of stranded assets and having to make write-downs (due to both physical and transition risks). At the time of publication, the High Court has refused permission for ClientEarth to continue this claim, on the basis that the board were best-placed to balance the multiple competing risks facing the company. ClientEarth has now been granted permission for this claim to be re-heard. While the judgment notes that Shell does not deny that it faces climate risks, the judgment finds that ClientEarth has failed to establish that Shell’s board have breached their duties in how it has managed these risks, noting that the existence of Shell’s transition plan demonstrated that the board must have considered such risks. Boards should ensure that they have robust plans to identify and manage climate risks to ensure that they are similarly protecting themselves.  

We have produced this Primer for board directors so they can be informed and prudent advocates, encouraging their boards to integrate the issue of climate change issues in the development of their companies’ corporate strategy, risk management oversight, governance and disclosure. This, alone, is the most effective thing directors can do to fulfil their obligations to their companies while steering well clear of any personal liability exposure from the potential increase of litigation.