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December 6, 2022

Climate change: New legal opinion adds more pressure on directors to act

A new legal opinion warns Philippines company directors to take climate change seriously or risk getting in trouble for gross negligence.

By Daniel Flatt

Climate change risk, Philippines, legal opinion
No corporate director is an island. Climate change risk continues to move up the regulatory agenda. (Photo by Michael Bednarek vis Shutterstock)
  • Considering climate change risk is part of general fiduciary duty in the Philippines.
  • Legal opinions are not binding but send a clear signal to boardrooms to factor in climate risk.
  • Around 500 climate-related litigation cases have been filed since 2020.

Pity the poor corporate director, as the threat of being held personally responsible for ignoring climate change risks just keeps on increasing.

In a new legal opinion published last week by the Commonwealth Climate and Law Initiative (CCLI), lawyers concluded directors of Philippine for-profit corporations “must take into consideration” climate change-related risks as part of their general fiduciary duty and an obligation to the country’s corporate governance laws.

The Philippines’ legal opinion is just another in a growing list commissioned by the CCLI. In the past year alone, opinions have been issued for Malaysia, Hong Kong, India, Singapore – all essentially drawing the same or similar conclusions: that company directors and board members are required by law to incorporate climate change considerations into their decision-making processes.

Although legal opinions are not binding and do not set legal precedent in the same way as a court ruling, they do send a clear signal to boardrooms to factor in climate risk. It also comes at a time when there is a huge debate, in the US especially, about whether companies should really have to bother themselves with what they view as costly but unrelated reporting requirements.

Mandatory sustainability reporting

In the Philippines at least, the new opinion is likely to hold even greater weight if, as is widely anticipated, the Securities and Exchange Commission (SEC) makes it mandatory for listed companies to produce sustainability reports next year.

“The failure to comply with the reporting rules may demonstrate gross negligence or bad faith in directing the affairs of the corporation in relation to climate change risks that the company may face, or regarding the company’s obligation to refrain from harming the environment,” says the CCLI.

Sustainability reporting won’t be a surprise for the 275 companies presently listed on Philippines stock exchanges. Since 2019, the SEC has requested sustainability reports be published on a comply or explain basis. In other words, a listed company does not have to publish a report but is required to justify why it cannot.

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According to analysis conducted by SGV, a consultancy firm which is part of EY, the number of reviewed sustainability reports rose from 73 in 2019 to 118 in 2020.  The most widely adopted (79%) reporting standard was the Global Reporting Initiative standards.

“There was [also] a notable increase in the use of the Task Force on Climate-related Financial Disclosures (TCFD) recommendations (41%), which suggests that listed companies are recognising the need to identify potential impacts of climate change to their businesses and mitigate climate risks,” wrote Benjamin Villacorte, a climate and sustainability partner at SGV in August.

Fancy being litigated?

Those unphased by legal opinions will be interested to learn court cases are becoming increasingly commonplace and NGOs are bringing highly credible legal challenges to bear. The recent legal action started by British charity ClientEarth in March against 13 directors at oil major Shell, claiming they had breached their duty to adequately prepare the company for the energy transition, could prove a watershed case.  

Working its way through the lethargic legal system, it’s unclear where ClientEarth's case will land, but lawyers comment about the general level of sophistication of NGOs such as ClientEarth in putting their cases forward. “They are very well-prepared and knowledgeable,” remarked one lawyer. “Their positions are certainly not something that you can just ignore.”

A similar case targeting directors is that of Ewan McGaughey versus Universities Superannuation Scheme (USS), launched late last year. The case centres on the USS’ ambition to reach net zero by 2050. In the view of the claimants who contribute to the fund, it has failed to prove how it intends to do so and, with its approximate exposure to fossil fuels of more than £1bn, isn’t trying very hard to find a way either.

In May, the High Court in London refused the action to go ahead on the grounds there was not enough evidence of a deliberate breach of duty. However, the Court of Appeal has granted permission to appeal. It is not known when that will be heard.

Expect more climate change litigation to come down the road. A lot more. According to Laws of the World & Grantham, up to May this year, there have been 2,002 climate-related litigation cases globally since 1986, of which approximately one-quarter of those have been filed between 2020 and 2022 alone (see chart).  

Directors, corporates and governments are all vulnerable to attack. There are multiple examples of governments being slapped down for breaches of their own laws. A very recent case is in the UK, where the English High Court found the UK government’s plans for reaching net zero was unlawful on the grounds it was too vague. It has been ordered to publish an updated strategy.

For most risk averse corporate directors, addressing climate change would be a sensible option to pursue, even if it's not high on their priority list.

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