This report details directors’ duties, enforcement, corporate disclosure, and directors’ and officers’ insurance using Australia, Canada, South Africa and UK as subject jurisdictions. It also includes a corporate governance primer with key questions to assist boards with governance, strategy and risk management oversight that should underpin climate-related financial issues.

The directors’ obligations broadly fall into these three categories:

• Duties of trust and loyalty, including good faith, proper purposes and best interests, and avoidance of conflicts (fiduciary)
• Due care and diligence
• Obligations in relation to ‘true and fair’ corporate disclosure.

Additionally, the sectoral significance of fossil fuel extractive industries in these economies have created significant financial risks, including:

• Physical: Exposure from direct or indirect impacts of climate and weather, e.g. floods
• Economic transition: Policy and regulatory reform risk, e.g. renewable energy policies
• Litigation: Attribution of climate change to company’s activities or failure to manage physical or economic transition risks.

A director may breach their fiduciary duties of trust and loyalty where:

• The director disregards, or is ignorant of, material financial risks
• No reasonable director could have rationally concluded the course of action was in the company’s best interests
• The director’s ability to make an independent judgment in the best interests is compromised by a material conflict of interest.

A director may breach due care and diligence:

• A total failure to consider and govern for foreseeable and financially material or the governance of climate risks
• A failure to monitor and oversee a robust corporate risk and reporting system that identifies and manages climate risks
• A breach by the company of misleading disclosure laws where a director fails to take reasonable steps to prevent the company from making a misleading disclosure in relation to the impacts of climate change.

Furthermore, directors may breach duties for specific circumstances:

• Pension and superannuation funds: Liability may arise where failure to consider climate risk in investment decisions results in lower returns and valuation losses over the long term
• Banks: Climate risk is relevant for banks’ financing function when lending to companies or projects that are materially exposed to the impacts of climate change
• Insurance companies: Directors must ensure clients are aware of climate risk, as it relates to both investments and underwriting capacities.

Enforcement of directors’ duties

Directors may be subject to derivative shareholder actions for breaching their duties. A derivative action allows a shareholder to stand in the shoes of the company and commence enforcement proceedings on behalf of the company.

Corporate disclosure of climate risk

Securities laws require that a ‘true and fair’ view of a company’s financial performance and prospects be represented. The Taskforce on Climate-related Financial Disclosures (TCFD) recommendations are likely to become increasingly influential touchstones of ‘true and fair’ disclosure, as large institutional investors continue to call for their implementation.

Directors’ and officers’ (D&O) insurance

In relation to climate risk, coverage under D&O insurance is generally unavailable for dishonest or intentional misconduct, misleading statements made in prospectuses, ‘prior known matters’, and where there is a failure to take all reasonable precautionary measures.

1. Climate risks and opportunities intersect with directors’ duties and disclosure obligations. The prevailing directors’ duties regimes under Australian, Canadian, South African and UK laws are all conceptually capable of being applied to governance failures in the identification, assessment, oversight and disclosure of climate-related financial risks.
2. Fiduciary duties are held by all directors. It involves performing duties with care and due diligence. A director may breach their fiduciary duties of trust and loyalty where they consciously disregard, or willfully ignore, material financial risks associated with climate change and their potential impact on corporate risk management and strategy.
3. A director may breach their duty of care and diligence where they totally fail to consider and govern for foreseeable and financially material climate risks, do so inadequately, or where they fail to monitor and oversee a robust corporate risk and reporting system that identifies and manages climate risks.
4. Directors may also face personal liability for breach of disclosure obligations to provide a true and fair view of corporate performance and prospects, particularly through securities class actions in Australia or Canada.
5. Australia is the jurisdiction where the liability risk to directors and fiduciaries is most material. This is not to say that the risk of liability is far-fetched in Canada, South Africa and the United Kingdom, and the risk is likely to increase in the future.
6. The physical, economic transition and liability impacts of climate change pose foreseeable risks. It affects many businesses across mainstream investment and planning horizons and are particularly acute in the fossil fuel extraction and combustion, transport, real estate and infrastructure, agriculture and financial services sectors.
7. Directors’ duties can be enforced through shareholder derivative actions, although the procedural barriers are high, or through the statutory oppression remedy. Some jurisdictions also allow for direct claims against directors by shareholders or derivative actions by non-shareholder stakeholders in certain circumstances.
8. Governance structures and risk management relating to the impacts of climate change are becoming increasingly robust, with the implementation of the Task Force on Climate-related Financial Disclosures (TCFD) recommendations a key factor driving this change.
9. Directors and fiduciaries require a proactive, dynamic and considered approach to the impact of climate change on strategy, risk management oversight and reporting. Such approach is the only safeguard against liability exposure.