Director’s Duties and Climate Change Risk – Standard of Care, Foreseeability and Enforceability
This article was originally posted on the Oxford Business Law Blog on 6 July 2021.
By Luh Luh Lan
It may still be some time before we see any director being hauled to the court on an action for breach of director’s duty of care solely because of their failure to consider climate risks and their impact on the company’s bottom-line.
In the recent 5th OBLB Annual Conference on ‘Business Law and the Transition to a Net Zero Carbon Economy’, the panel for Day Three (Topic: Climate Change in the Boardroom) took up the director’s duties and liabilities in relation to climate change risks. The panelists, Sarah Baker, Ernest Lim and Ellie Mulholland, were of the opinion that in addition to environmental laws that impose accessorial liability on corporate officers, including directors, the latter are now under a positive duty to consider climate change risks within the existing corporate law framework of director’s fiduciary duties, at least in Australia, Singapore and the UK.
It is true that the wordings of the statutory duties on directors to exercise ‘due care and diligence’ (section 180(1) of the Australia Corporation Act; section 157(1) of the Singapore Companies Act and section 172 of the UK Companies Act) may generally be wide enough to include a duty for the directors to take into account climate risks in decision-making. It is also true that recent legislative changes, especially on disclosure and financial reporting, have increased the pressure on directors to consider climate change issues. Nonetheless, it may still be some time before we see any director being hauled to the court on an action for breach of director’s duty of care solely because of her failure to consider climate risks and their impact on the company’s bottom-line. This is particularly so if the company does not fall within the category of a ‘carbon major’, which essentially consists only about 100 companies around the world. I base my scepticisms on three grounds.
First, the traditional concept of director’s duty of care and skill (whether under common law or in its codified form) has been, and still is, a blunt instrument to shape director’s behaviour. Practically, this has been shown by the empirical study carried out by Brett McDonnell and his co-authors in their paper, Green Boardrooms. Conceptually, as Riley rightly pointed out back in 1999, while the role or content of the duty (eg, duty to consider climate risk impacts on the company’s operations) can be identified and specified, it is difficult to set the standard of liability by which a director’s failure to fulfil the duty of care is judged. In other words, by what standard can we say a director should be faulted for taking too little consideration or acting too slowly when it comes to climate change issues, especially when the company is not a carbon major? Although most jurisdictions now adopt an objective test with an element of subjectivity in assessing the standard of care (Australia: Charterbridge Corporation Ltd v Lloyds Bank Ltd [1970] Ch 62, Cassimatis v ASIC [2020] FCAFC 52; Singapore: Ho Kang Peng v Scintronix [2014] 3 SLR 329; UK: section 174 of the UK Companies Act), this issue is far from settled.
Second, despite the broad understanding of the causes of climate change, in the absence of specific actions that bring about direct harms, it is difficult to pinpoint the corporate decisions made by the directors that may have a long-term effect on the environment. The issue is foreseeability. In the latest Global Climate Litigation Report published by the UN Environment Programme, it is shown that the number of cases involving private defendants was small compared to litigation against the government or the state. The plaintiffs generally face an uphill challenge in defining the precise causal relationship between a particular source of emissions and individualized climate change harms. It is also difficult to prove that the defendants knew or should have known that climate change increased the risk that the company’s action would harm others. Although in the recent case of Milieudefensie et al v Royal Dutch Shell (ECLI:NL:RBDHA:2021:5337), the district court of The Hague held that Shell should change its business model to reach an emissions reduction target of 45% by 2030 (in contrast to Shell’s initial plan of 30% by 2035), it remains to be seen if the directors of Shell can be held liable for failure to foresee that their earlier decisions fell short of the court’s expectation.
It is difficult to pinpoint the corporate decisions made by the directors that may have a long-term effect on the environment
Third, in most common law jurisdictions, enforcement of director’s duties is still left to private actions taken by either the board or shareholders on behalf of the company. The rule in Foss v Harbottle has traditionally inhibited shareholders litigation for breach of director’s duties, in particular on the ground of breach of duty of care and skill. This still holds true for Singapore and the UK. In their 2009 paper, John Armour and co-authors showed that the amount of private litigation against public company directors in the UK is negligible and the risk of personal liability for breach of director’s duties is very low. The situation is similar in Singapore. Although Australia is said to be an outlier vis-à-vis the other common law jurisdictions with its civil penalty and public enforcement regime, actions against directors solely on the ground of a breach of duty of care have not occurred until the recent case of Cassimatis v ASIC [2020] FCAFC 52. In a 2-1 decision, the Federal Court of Australia held that the directors of a financial advisory firm breached their duty of care under section 180 of the Australia Corporation Act when they should have foreseen that their highly leveraged investment strategy would result in catastrophic losses to their clients during the Global Financial Crisis in 2008, causing its Australian Financial Services license to be revoked. It is still too early to tell if Cassimatis will open a floodgate in Australia on litigation against directors for breach for duty of care in general. Outside of Australia, sadly, we may have to content ourselves with the reality that unless there is an overhaul in the enforcement regime of directors’ duties, we are unlikely to see a spike in the number of cases against directors solely on the ground of breach of duty of care for failure to consider climate change risks.
Luh Luh Lan is an Associate Professor at NUS Business School and at the Faculty of Law, National University of Singapore.
This post is based on contributions to and the discussion at the 5th Annual Oxford Business Law Blog conference on ‘Business Law and the Transition to a Net Zero Carbon Economy’ which took place online on 25 to 27 May 2021. This post is forthcoming in Andreas Engert, Luca Enriques, Georg Ringe, Umakanth Varottil and Thom Wetzer (eds), Business Law and the Transition to a Net Zero Carbon Economy (CH Beck - Hart Publishing 2021) (forthcoming).
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Event: Business Law and the Transition to a Net Zero Carbon Economy (25 - 27 May 2021)
Videos of the presentations are available on the ECGI website and YouTube channel.