Regulation, policy drivers and board-level action
Summary
Dr Emily Webster (†), Assistant Professor in Environmental Law at the Department of Land Economy, University of Cambridge, discussed the uncertainties and inconsistencies in the regulatory and policy landscape and how these can act as a barrier to board-level action on climate change. These barriers exist both within and across jurisdictions. For example, the landscape for mandatory disclosure has evolved rapidly in recent years, and indications are that it will continue to do so. Greater clarity on directors’ duties to take substantive action on climate change is needed if this is to be a significant driver for board-level action going forward.
Key Takeaways
- The rapidly evolving regulatory and policy landscape relating to climate change and net zero is a key challenge for boards. For example, in the UK back in 2015 and 2016, the Government was adamant that business application of the Task Force on Climate-Related Financial Disclosures (TCFD) recommendations was voluntary, but in subsequent years an approach has developed introducing mandatory climate risk disclosure in line with TCFD guidance. The development of this area of law has been reactive and piecemeal, creating uncertainty and increasing the likelihood of further changes going forward. For companies with sprawling value chains across jurisdictions, the landscape is further complicated by discrepancies between jurisdictions in terms of the regulatory landscape for corporate climate action. Country-level requirements and frameworks for net zero targets, and regulations on supply-chain due diligence processes, provide good examples of such discrepancies. To overcome these issues, it would be helpful for politicians to look further ahead – 10, 15, 20 or 30 years, rather than addressing these issues along usual political timeframes and electoral cycles.
- Litigation is often cited as a driver for board-level climate action. But in the UK, significant challenges still exist in bringing these cases to trial. For example, a client derivative action was recently brought against the directors at Shell, claiming that they had breached their duty to ensure the long-term success of the company under the 2006 Companies Act. While the judge accepted that climate change poses a risk to Shell, they did not accept that the directors were acting unreasonably, so the trial was not taken forward. Under the 2006 Act, directors have a duty to act in the best interest of the company and of its shareholder members as a whole. While there is a section requiring them to consider the environment, how they do so is up to the directors. Furthermore, the judge was critical that demonstrations of activism could be pursued through the courts. It is likely there will be a time when directors who are not taking substantive action on climate change are found to be in breach of their duty. But we are not there yet, and there may be scope for government to make directors’ duties clearer in relation to the environment.
- Boards would be wise to start thinking about environmental issues in an interrelated way – earth systems science is increasingly looking at the linkages between key environmental issues. The European Green Deal and other types of directives are already talking about planetary boundaries and system tipping points. Over the next 10 to 15 years, we are likely to see more focus on a holistic approach to addressing environmental problems, or at least considering them as of equal importance to other issues. Biodiversity loss and climate change are core planetary boundaries that are interconnected. Therefore anticipating movement towards regulation of these boundaries, as well as other Earth systems, and integrating this into corporate strategy, is important.
Conclusion
“We’re looking at a really uncertain, evolving, uneven kind of regulatory environment, both domestically, regionally and globally. But I think it’s safe to say that legal obligations will become more onerous as time progresses and the impacts of climate change manifest increasingly.”
Given the shifting landscape and the general direction of travel, boards should subscribe to the most robust climate initiatives and anticipate that these types of obligations are going to be mandatory at some point or another. Directors should ensure that they are up to date with net zero strategies, not only imposing targets but also following through to sufficient implementation and delivery.
Links
Dr Emily Webster, University of Cambridge – Centre for Climate Engagement (climatehughes.org)
Dr Emily Webster | C-EENRG (cam.ac.uk)
A European Green Deal (europa.eu)
Scientists are defining the boundaries of planetary survival | World Economic Forum (weforum.org)
Slingshot