
Directors' liability and climate risk: White paper on India
This paper explores the legal obligations of directors in addressing climate risk and mitigating their environmental impact. This report studies the duties of directors in relation to trust and loyalty, competence, disclosure, and their application in the context of climate risk, according to existing company and securities laws in India.
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OVERVIEW
Duties of Trust and Loyalty
Directors owe a duty of care, skill, diligence, good faith and loyalty to the company and its stakeholders. Climate risk poses risks to a business’s long-term durability, and directors must consider this when performing their fiduciary duties. If a company fails to consider the financial risks from climate change, it risks exposing the company’s financial position and its directors’ liability.
Duties of Competence
In pursuing its best interests, a company must remain competent in governed risk management. “Companies and their directors bear a duty to act to protect long term sustainable value for various stakeholders, which the importance of climate risk brings into sharp focus.” Climate risk comes in three types: physical risks, transition risks, and litigation risks. Directors must undertake appropriate steps to disclose these risks, use climate mitigation strategies, and report to stakeholders on those risks. Additionally, the report suggests the use of strategies like scenario modelling to gauge a company’s viability with carbon pricing and temperature settings.
Duties of Disclosure
Corporate and securities laws in India must ensure disclosure obligations are met, including those of a climate risk nature. “…it is evident from the scope and tenor of the duties of directors in section 166(3) of the Companies Act to exercise their duties with reasonable care, skill and diligence and to exercise independent judgment.” Disclosures from the board’s annual report, regulatory requirements like SEBI ICDR regulations and Business Responsibility and Sustainability Reporting (BRSR) disclosures, and litigation risk arising from climate risk fall under directorial oversight.
Conclusion
In conclusion, the report stresses the impact of fiduciary obligations to directors in addressing climate risk and how non-compliance can expose a business to significant financial loss and liability risks. It emphasises the importance of competent governance, noting how directors must remain mindful of their limitations and the necessity of expert specialists in environmental matters. The report also states the importance of transparency, stakeholder participation, and accountability as dire necessities. These essential ESG issues could build stronger businesses globally that can navigate the risks that climate change poses.
The report calls for companies to take an outcome-based and evidence-led approach while steering a rapid and orderly transition towards a net-zero carbon economy. It highlights the need to include climate change in the terms of governance audits while adhering to company and securities laws in India. The report further suggests stronger communication from directors to stakeholders, policymakers, and investors about the risks of climate change.