Cynthia A. Williams is the Osler Chair in Business Law at Osgoode Hall Law School at York University; Sarah Barker is a Partner and Head of Climate Risk Governance at MinterEllison; and Alex Cooper is a lawyer at the Commonwealth Climate and Law Initiative (CCLI). This post is based on a memorandum by Prof. Williams, Ms. Barker, Mr. Cooper; Robert G. Eccles, Visiting Professor of Management Practice at Oxford University Said Business School; and Ellie Mulholland, Director of the Commonwealth Climate and Law Initiative. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance (discussed on the Forum here) and Will Corporations Deliver Value to All Stakeholders?, both by Lucian A. Bebchuk and Roberto Tallarita; For Whom Corporate Leaders Bargain by Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita (discussed on the Forum here); and Restoration: The Role Stakeholder Governance Must Play in Recreating a Fair and Sustainable American Economy—A Reply to Professor Rock by Leo E. Strine, Jr. (discussed on the Forum here).
As exemplified by the attention paid by the business and investor communities to the COP26 event, the last few years have seen a significant change in the understanding of climate change as a material risk to businesses, with government and capital markets responding. There has also been a notable increase in the number of so-called ‘Caremark’ claims against directors and officers for failing to exercise proper oversight surviving motions to dismiss. These two developments, construed together, indicate that directors and officers of Delaware corporations are navigating their corporations through an increasingly risky environment, and there is the potential that they may face litigation and ultimately personal liability for failing to manage these risks. Delaware directors and their attorneys must understand this new legal risk.
Climate change poses physical, economic transition and liability risks to corporations and their business models, which are already becoming apparent in the US. Wildfires and extreme storm events, the likelihood and intensity of which have been increased by climate change, have led to billions of dollars of losses. The Biden administration has emphasized climate change as part of US foreign and domestic policy as well as financial regulation, and has set a goal of reducing greenhouse gas emissions by 50-52% by 2030, as part of a transition to net zero greenhouse gas emissions, relative to 2005 levels, by 2050, and has released a long-term strategy detailing how the US can achieve this goal. An increasing number of countries worldwide have set out policies to reach net-zero greenhouse gas emissions by mid-century, and financial institutions and investors are increasingly asking their investee companies to demonstrate how their business models are compatible with the transition to a low-carbon economy. The US Securities and Exchange Commission (SEC) has indicated that it will enforce its existing guidance on the disclosure of climate change risk, and is widely expected to promulgate climate change and ESG disclosure requirements, while the Financial Accounting Standards Board has issued guidance to staff on the incorporation of ESG matters, including climate change, into financial statements. The Federal Reserve Bank Board of Governors has recognized climate change as posing a systemic risk to the US financial system. Climate litigation is becoming increasingly common and varied, and boards should be increasingly alert to the risk that their companies could find themselves the subject of strategic litigation or traditional compensation claims when climate losses arise.
