INSIGHT by Andreas Hoesli, attorney-at-law, LL.M., PhD Candidate at University of Zurich. This article builds on a piece written by the author together with Prof. Rolf H. Weber published in Neue Zürcher Zeitung on 16 November 2020.
| The transition to a “greener” economy is one of the greatest challenges of our time. Substantially reducing greenhouse gas emissions and developing technical innovations are key to limiting global warming. Almost all sectors of the economy are affected, from industry, agriculture, transport to finance and insurance. The law plays an important role in this process.
By signing the Paris Agreement in December 2015, the international community agreed on the goal of limiting global average temperature rise to 1.5°C (or “well below” 2°C degrees) compared to pre-industrial levels. This requires drastic emission reductions of around 50 percent by 2030 and “net zero” by 2050. States also agreed in Paris to steer financial flows in a more “climate-friendly” direction. Given its economic power, the private sector plays a key role in this global transition.
Today, however, binding obligations on private corporations to reduce or limit their greenhouse gas emissions are scarce and highly fragmented. In essence, they consist of CO2 pricing mechanisms, that is, CO2-taxes and emissions trading systems (ETS).
On the one hand, from a business perspective, climate change is an opportunity, for example with regard to the investments and technical innovations required for the turnaround. On the other hand, climate change is now widely recognized as a significant financial risk to businesses and investors. Key financial market institutions now even consider climate change to be a potential threat to global financial stability.
In particular, economists warn that markets currently do not adequately price climate risks, which – in a “business as usual” scenario – could lead to sudden and drastic value adjustments of fossil fuel assets (“stranded assets“).
Other developments increase the pressure on companies to do more to protect the climate. Institutional investors such as pension funds and certain asset managers are pushing for measures to protect the climate, such as the introduction of CO2reduction targets at the company level or the (gradual) exit from coal investments (“divestment”). Shareholder coalitions put climate issues on the agenda of general meetings, with increasing success. In addition, stricter regulations can be expected, for example in the financial market sector (transparency and due diligence). Further, climate change litigation against companies (and in some cases, against members of the board and management) is on the rise, in particular in the energy and financial sector. Very recently, in the matter of McVeigh v. REST, an Australian superannuation fund settled a lawsuit brought by one of its beneficiaries by accepting to “take ‘active steps’ to consider, measure and manage financial risks posed by climate change and other relevant [environmental, social and governance] risks”, among other things. Finally, pressure from civil society on businesses to do more in terms of addressing climate change is increasing.
In light of the above, climate change is not “only” a reputational risk, but increasingly a liability risk calling for adequate corporate governance measures. The Board of Directors, overseeing the strategy and risk management of the company, is well advised to implement measures to ensure a solid “Corporate Climate Responsibility”. In this context, climate-related reporting (transparency) and due diligence are important keywords.
Given that (a) there are currently no specific legal requirements for corporations to reduce their greenhouse gas emissions, and that (b) relevant standards in company law (for instance, the duty of care) are framed in open terms (meaning that they do not prescribe a specific behaviour), best practices and recommendations are emerging. Such voluntary standards are often described as “soft law”.
In the area of climate transparency, the 2017 Recommendations published by the Task Force on Climate-Related Financial Disclosures (TCFD) are currently the most often referred to set of standards. The TCFD is an industry-led expert group set up by the Financial Stability Board. The Recommendations were largely developed by the private sector and are thus widely accepted. They relate to the reporting of financially material climate-related information in the four thematic areas of governance, strategy, risk management, and metrics and targets. With respect to due diligence requirements, the OECD Guidelines for Multinational Enterprises are an important reference. Although in their current 2011 version they do not explicitly mention climate change, a number of climate change-related complaints against companies were brought under the OECD Guidelines in recent years (for instance, see Australian bushfire victims and FoE Australia vs. ANZ Bank).
The “hardening” of climate-related voluntary best practices for companies into binding law has already begun. As an example, the TCFD Recommendations are being incorporated into financial market regulations in the European Union and elsewhere. For instance, the UK as well as New Zealand recently announced the introduction of mandatory climate-related financial disclosures in line with the TCFD Recommendations. In Switzerland, the Financial Market Supervisory Authority (FINMA) is considering doing the same. Further, building on the OECD Guidelines (and other standards), the EU is currently working on a legislative proposal for mandatory human rights and environmental supply chain due diligence legislation which is expected to be published in spring 2021, with implications for climate change due diligence.
Taking “Corporate Climate Responsibility” seriously rather than engaging in “greenwashing” requires questioning established processes and taking appropriate account of the effects of climate change – among other things, as a matter of reducing liability risks. As a first step, climate-related risks and opportunities specific to a company must be identified, for instance by means of scenario analysis. The results provide the Board of Directors with sufficient information to develop a climate strategy (including measurable targets) to be implemented with appropriate measures.
From a legal perspective, a number of issues remain to be discussed. How do openly framed duties of care translate into concrete terms with regard to Corporate Climate Responsibility? What are the implications for directors’ civil liability? What degree of climate transparency is required?
In order to answer these questions, internationally developed best practices are important references. Court decisions providing more clarity on these questions would certainly be welcome.
The described “tightening” of the regulatory framework aside, it is important to note that existing corporate law obligations (such as reporting obligations or the duty of care) may oblige companies to adequately disclose climate risks and to take them into account when taking important business decisions, for instance in due diligence processes prior to a major investment, already today. In particular, this is the case where climate risks represent financial risks (to a specific company), which – as we have seen – is broadly accepted, but also beyond such a “business case” scenario.
Due to the complexity of the challenges posed by climate change, “soft law” is a suitable instrument on the pathway to a more effective regulatory framework. Nonetheless, existing legal provisions can capture legal issues related to climate change already today, at least to some extent.
| brief bio
Andreas Hoesli is a Swiss-qualified attorney-at-law, holding an LL.M. degree from the University of New South Wales, Sydney. He is currently a PhD candidate at the University of Zurich, Switzerland, and visiting researcher at the University of Copenhagen (Centre for International Law and Governance). Andreas’ research focuses on corporate accountability in the context of climate change.
| All opinions expressed are those of the author. investESG.eu is an independent and neutral platform dedicated to generating debate around ESG investing topics.