Climate change and legal risk: global warming comes to the boardroom
Climate change is no longer simply a corporate social responsibility issue. It will have the same impact on boards’ members, organization and decisions as privacy or cybersecurity, for example.
Concerns about climate change look set to deepen and to emerge forcefully at companies. On top of its environmental and economic elements and regulatory and strategic consequences for the private sector, climate change will increase the legal risk and companies will have to protect themselves by strengthening their corporate governance and their legal and compliance functions. Boards of directors will be at the heart of the process.
Time to submit climate accounts
It is now three years since the Paris Agreement secured undertakings by the signing countries to determine and report their emissions reduction targets, together with the policies and measures they will have to put in place to achieve the common goal to keep global warming well below 2ºC above pre-industrial levels; with the ambition to limit that increase to 1.5ºC. The Agreement lays down stocktaking obligations every five years and, as the first assessment in 2023 draws near along with the predictions that will come before it, it is likely that mitigation and adaptation measures will be stepped up having a material effect on the private sector.
The EU has set very ambitious targets by 2030 for reducing greenhouse gas emissions, increasing the share of renewable energy in final consumption and improving energy efficiency.
The Spanish government is in the final stages of drawing up two key documents: the Preliminary Bill for the Climate Change and Energy Transition Law and the Integrated National Energy and Climate Plan.
This will all affect companies’ development plans and strategies. We will not be talking here about the general impacts on emissions, energy efficiency or insurance or about business risks and opportunities associated with the so-called circular economy. Instead we will be taking a look at a few relevant legal issues for companies and their managing bodies.
The financial industry will feel the pressure and pass it on
The impacts have already been felt by financial institutions and will go on to have an indirect effect on other companies. European and British Banking regulatory and supervisory authorities have pointed to the credit and market risk associated with physical phenomena and with exposure to industries affected by energy transition. They have called on financial institutions to adapt their corporate governance and design their products with regard to these risks.
The European Commission is pushing forward its policy of promoting sustainable finance and in May 2018 adopted a package of measures which are expected to change the rules of play for investment and finance and include a possible Regulation that will require investment companies to ask about their clients’ preferences in relation to environmental factors.
Companies outside the financial industry should take note. Besides setting an example in corporate governance matters, banks’ policies will have an effect on the prices of their financing products not just for particularly exposed companies but also for other sectors and activities such as purchasing goods and services (consumer goods and housing, for example).
The effect on the capital markets of the requirements or preferences of funds and of final savers will become increasingly noticeable.
The large banks have already drawn up internal policies, limiting financing for certain activities including any contributing to global warming. We also believe that the banks with bring to their corporate loans disclosure and conduct obligations related to climate change as they have been doing with other sensitive legislation on sanctions or anti-bribery matters.
More public disclosure obligations
European Directive 2014/95 on non-financial information must be read and applied from the standpoint of climate change. We also want to draw attention to the principles approved in December 2016 by the Task Force on Climate-Related Financial Disclosures (https://www.fsb-tcfd.org/); which while not binding are illustrative. Listed companies and other “public interest” companies have a special duty to monitor climate risk as we are reminded for example by the Spanish Securities Market Commission (CNMV) in its 2017 guidance on audit committees.
Large companies have long been publishing sustainability reports, calculating the carbon footprint of their activities, undertaking to use electricity from renewable sources, and signing up to initiatives like the Carbon Disclosure Project.
A shower of lawsuits
Litigation and penalty risks will increase. The courts will not remain insensitive. It is telling to see how many judges are in the Expert Group on Climate Obligations of Enterprises (https://climateprinciplesforenterprises.org/) which has just published its principles. Lawsuits will ensue from penalties for breaches of the legislation, non-contractual or tort liability and the liability of securities issuers in relation to public disclosure.
On top of these lawsuits arising in short from the distribution of the cost of mitigation and adaptation measures, climate change shows signs of pervading legal culture in a varied range of fields taking in business combinations, public procurement, zoning and planning or consumer lawsuits.
Rafael González-Gallarza, partner at Garrigues Corporate Department, and Antonio Baena, partner in charge of G-advisory