Navigating the Evolving Legal Framework of Climate Governance

Climate change has taken a permanent seat in global boardrooms and c-suites as a strategic imperative.  Alongside increased attention to broader environmental, social and governance (ESG) issues, boards are focused on understanding how climate will affect a company’s value, risk, and opportunity. In parallel, the push to adopt net zero emissions goals, the transition from voluntary to mandatory corporate disclosure, and the rise in climate litigation has squarely engaged the legal community on climate issues.

This piece explores interactions between law, governance and climate as we evolve into a more legalistic framework. As someone working at the intersection of these three fields, the pace of change with respect to insights, regulations and expected action has been momentous.

The Rise of Climate Litigation

As of December 2022, there have been over 2,000 climate-related cases filed in 65 jurisdictions,  more than doubling the number since 2017.[1] Three emerging case trends are worth exploring: (i) governments are being challenged on constitutional grounds in respect of their climate-related legislation (or lack thereof); (ii) companies and/or their directors are being challenged for insufficient climate action or disclosures; and (iii) companies are being challenged for “greenwashing” (over-stating their climate achievements). 

The constitutional cases will be interesting to watch as countries determine their approach to their Paris commitments. To date, cases have often hinged on “justiciability”—whether the claim is one for the courts to decide or whether it is essentially political in nature and more properly determined in another forum.[2] However, the justiciability threshold is being overcome as governments enact (or repeal) specific climate-related legislation, as this type of activity is more susceptible to legal challenge on constitutional grounds. It is noteworthy that youth groups (typically supported by non-governmental organizations) are often bringing these cases forward, arguing that their generation will be disproportionately affected by climate change outcomes.

Cases challenging companies and corporate action may also include claims against individual directors for breach of fiduciary duty.[3] In ClientEarth v. Shell, the directors were personally sued for breach of fiduciary duty with respect to the company’s approach to climate change. The claim was dismissed on the Court’s determination that the claimants failed to establish a prima facie case that the directors’ approach fell outside the range of reasonable responses to climate change risk. Noting that the law respects the autonomy of the decision-making of directors on commercial issues and their judgment as to what is in the best interests of their members as a whole, the Court applied what is commonly referred to as the “business judgment rule”.

Moving From Voluntary to Mandatory Climate Disclosures

Cases around disclosure—whether too little or too much—reveal the nascent and ambiguous state of climate disclosure. An Australian pension trust was sued by a young member for failing to provide sufficient risk information or mitigation plans and failing to discharge its trustee duties in relation to the impact of climate change on its investments.[4] Although the case was settled before reaching trial, the pension trust agreed to implement policies integrating climate risk into its investment management decisions and processes to measure, monitor and report outcomes. We have also seen cases and other proceedings alleging that companies have overstated their disclosures (greenwashing), for example by exaggerating their climate credentials.

A significant number of global initiatives are currently underway to remedy the disclosure vacuum. To date, climate-related disclosures have largely been done on a voluntary basis, with the Task Force on Climate-Related Financial Disclosures (TCFD) providing the most globally adopted framework. There is a growing desire for a more mandatory, consistent and harmonized approach that will offer clarity on climate risks and opportunities to enable better decision-making. The United States Securities and Exchange Commission and the Canadian Securities Administrators have issued proposals regarding mandatory climate disclosure. The IFRS Foundation has established the International Sustainability Standards Board (ISSB) and issued two Sustainability Disclosure Standards, including one on climate disclosure in June 2023. They are currently working with jurisdictions on adoption. 

Harmonizing disclosure standards globally is a recurrent theme from investors and corporations. The need is critical with a borderless issue such as climate change and international capital flows necessary to support the energy transition. The ISSB standards, which build on the work of the TCFD and integrate other reporting initiatives like the Sustainability Accounting Standards Board (SASB), are a much-needed step in the right direction.

This shift from voluntary to mandatory reporting could play out in a few ways with respect to climate litigation. On the one hand, companies will have more certainty about what and how to report. On the other hand, litigation risk may increase with more disclosure, as there is more material to challenge. Hopefully, this risk will not result in a “chill” whereby companies limit their disclosures to the bare minimum, particularly given that climate data remains imperfect, and information is generally forward-looking. In this context, the championing of new mandatory rules to encourage more comprehensive, decision-useful reporting should be accompanied by a review and enhancement of “safe harbour” protections for future-oriented climate disclosures. 

Around The Boardroom Table

While directors have broadly recognized the strategic imperative of climate change to their business, they are also being held to greater account on their governance of climate issues. If the goal of good governance is to create a framework which enables and promotes sound decision-making, then the first order of business for directors is to examine how climate issues are managed within the organization. This starts in the boardroom with a strategic understanding of the risks and opportunities. It may also include refreshing board skills matrices to ensure climate and broader ESG expertise is present around the table.

Understanding management’s climate governance structure and risk management practices will reveal whether your company’s approach is organized, disciplined and thoughtful, thereby enabling solid decision-making. Today’s climate cases are showing us that courts will be hesitant to replace their judgment for directors, particularly when it is clear that the board has properly turned its mind to the issue at hand (consistent with general corporate law). 

Looking beyond the boardroom, ensuring reporting is keeping up with—and anticipating—changes in climate disclosure will put you in a good position vis-à-vis your shareholders and other stakeholders, improve climate conversations, reduce litigation risk and, most importantly, set the company up for success in developing and evolving its strategic approach to climate change.

Michael Kelly is the Chief Legal & Sustainability Officer at OMERS. He created OMERS Sustainable Investing Framework in 2019 and chairs its Sustainable Investing Committee. A Chartered Director (C.Dir), Michael is a Board member of the Canadian Coalition for Good Governance and the Investor Leadership Network and a member of Canada’s Sustainable Finance Action Council.