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Directors' duties and climate change: sustainable practices

Adam Kobeissi and Edward Craft from Wedlake Bell look at the role that the law has to play in relation to companies obligations relating to climate change.

Greta Thunberg’s appearance in front of the United Nations in New York. Extinction Rebellion on the streets. Storm devastation across The Bahamas and cancelled Rugby World Cup matches in Japan. Environmental impact often tops the media agenda and, in recent years, we have observed deeper convergence between corporate responsibility and environmental issues.

In late August, the US Business Roundtable issued its Statement on the Purpose of a Corporation, bringing the classic “shareholder first” model of a US corporation under scrutiny. At the same time, one of the UK Supreme Court justices (Lord Sales) delivered a speech to the Anglo-Australian Law Society in Sydney entitled Directors’ Duties and climate change: Keeping pace with environmental challenges. Lord Sales considered current law and evolving practice and concluded that there are at present three general heads under which directors must consider environmental concerns in operating companies. Directors must:

  1. Comply with a range of regulatory and disclosure requirements relating to environmental matters (including sector-specific regulation);
  2. Conduct themselves in a manner which prevents the corporation becoming exposed to civil and criminal liability for polluting activities (and thereby also avoid the concomitant financial and reputational damage); and
  3. Discharge their statutory duties, including the duty under section 172 of the Companies Act 2006 to promote the success of the company for the benefit of its members.

Regarding item 3 above, section 172 requires company directors to “have regard” to a number of stakeholder factors (sub-sections (a) to (f)) when making company decisions. In particular, factor (d) requires directors to consider “the impact of the company’s operations on the community and the environment“. Furthermore, factor (a) requires directors to consider the long term impact of their decisions, under which issues of environmental sustainability may also arise.

But how may directors balance the competing factors influencing the success of a company? These issues will always prove most challenging for the finance director who is, in addition to his or her general responsibilities as a director, also responsible for the presentation of the balance sheet and monthly revenue target.

Quantifying the potential damage which may be caused by operations is not as easy as calculating the profits to be derived therefrom. Environmental considerations have come a long way from merely avoiding the pouring of pollutants directly into a river. Activities requiring too much energy, for example, are now just as likely to be under scrutiny as the discharging of debts.

Taking climate change issues into account

Directors are the servants of the company. The company comprises its members. Therefore, if environmental considerations cause financial disbenefit to the company’s members, the directors might find themselves in breach of their principal statutory duties. There is a fine balance to be struck and the difficulties posed by corporate environmentalism highlight the struggle between short term performance and long term risk management.

There is a powerful body of thinking to suggest that increased transparency will drive better behaviours. Therefore, there have been significant moves towards greater narrative reporting, including in relation to environmental matters. Most recently, these reporting obligations have been supplemented by a new statement required by The Companies (Miscellaneous Reporting) Regulations 2018, which has inserted a new section 414CZA into the Companies Act 2006. That section requires directors to produce a strategic report including a statement which describes how the directors have had regard to the stakeholder factors contained in (a) to (f) of section 172(1). The statement must also be published on a company website. This new requirement is in addition to other general obligations on certain companies to report on their annual energy consumption, as well as the annual quantity of carbon dioxide emissions for which the company is responsible.

Ultimately, directors must take climate change issues into account when making company decisions: for the proper discharge of their duties, in delivering sustainable business growth for shareholders, and in making the business a good place to work. In 2018, Theresa May’s corporate reporting reforms brought in new models for employee engagement. Will we see the same for environmental impact issues? In light of the shifting legal and socio-political landscape, we think that it will not be many years before a designated director for environmental impact will be commonplace in UK boardrooms.

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