UK corporate directors urged to keep abreast of climate change issues

Corporate litigation expert Michael Fletcher of Pinsent Masons, the law firm behind Out-Law, said that while the UK courts are yet to see the type of climate change-related litigation experienced in other jurisdictions, future "shareholder activism" could not be ruled out given the current strength of opinion on climate change.

Speaking in Sydney earlier this month (15-page / 298KB PDF), Supreme Court judge Lord Sales said that there was a clear case for "company laws to be modified, by legislation, to provide a greater impetus to boards and individual directors to accord greater attention and weight to climate issues". Lord Sales told the Anglo-Australian Law Society that this could be done by requiring companies to appoint a designated board member responsible for "environmental impact issues", either by way of legislation or as a "regulatory best practice requirement".

Corporate law expert Tom Proverbs-Garbett of Pinsent Masons said that a legislative requirement "would diverge somewhat from the UK's traditional method of strengthening corporate governance through non-legislative means".

"The comments also perhaps underestimate the existing power of section 172 of the 2006 Companies Act, which already requires the directors of a company to have regard to the impact of the company's operations on the community and the environment, among other things," he said. "From 2019, there is also an obligation on large companies to report on how that factor, among others has been considered and the effect of that consideration on the company's decisions and strategies during the financial year."

"Lord Sales acknowledges this requirement, but argues more can and should be done," he said.

"The suggestion that a non-executive director (NED) could take responsibility for championing environmental matters for their company, following the approach taken to workforce engagement in the most recent iteration of the UK Corporate Governance Code, reflects the increasing visibility of environmental, social and governance (ESG) matters for both companies and their investors. The FRC's draft Stewardship Code, for example, makes explicit that signatories are expected to take into account material ESG factors, including climate change, when fulfilling their stewardship responsibilities," he said.

Lord Sales noted in his speech that, based on the current law, "there is much force in the view that directors may and, increasingly, must take into account and accord significant weight to climate change in their decision-making".

"This is not least because a failure to act sustainably is more and more likely to have adverse financial impacts on companies who are, or are perceived to be, behind the curve on environmental issues," he said.

Lord Sales said the position of company directors in regard to climate change was governed by the existing regulatory and legal disclosure regimes; their responsibility to assess the financial impact of any fines relating to polluting activities and tax incentives to encourage a shift to low carbon activity on their companies; and their "general fiduciary obligations" to shareholders.

Michael Fletcher said that while companies in the UK were yet to experience a significant volume of climate change-related litigation, this was not the case elsewhere, particularly in the US.

"Particularly given the current strength of public opinion on climate change, we may well see growing shareholder activism in this area in the UK too, with minority shareholders wishing to drive a more environment-focused agenda looking to use the wider powers to bring derivative actions against directors which were introduced by the Companies Act," he said. "Litigation may become seen as a tool to influence corporate behaviour and public policy on climate change."

"To guard against the risk of these types of claims, company directors must keep fully abreast of the latest regulations and guidance applicable to them and develop robust practices around factoring environmental considerations into board decision-making. As Lord Sales points out, it is important to carefully document corporate decisions, accurately reflect these in annual reports and disclosures, and foster a culture of seeking specialist advice on the environmental impacts of decisions," he said.