Climate change is now widely recognised as a material financial and strategic business risk to many enterprises and their business environments. Consideration of these risks is now a boardroom and governance imperative. At Davos 2019, the World Economic Forum published guidance for corporate Boards on how to establish climate governance in their companies. Blackrock's Larry Fink commented in his open letter to CEOs in 2020 that 'Climate change has become a defining factor in companies' long-term prospects'.
Climate related risks have a number of manifestations at a corporate governance level.
Strategy, accountability and investment decisions: Identifying, assessing, disclosing and managing climate risk is fast becoming a key aspect of corporate governance. Boards and senior management need to consider risks and resilience to climate related risks, and how these risks are positioned within the business's risk framework, especially in terms of periodic identification, appraisal, mitigation and reporting. In some cases this can require boardroom climate expertise or expert reporting lines to the board, so that climate risks, challenges and opportunities, are understood and current. Boards and senior management will need to factor material climate risks, challenges and opportunities into strategy formulation, risk assessment and investment decisions. This is an intergenerational issue which extends beyond the tenure of any management team.
Climate related risks, and the adopted strategy and management of these risks, can impact on costs of and ability to access capital and treasury activities, insurance costs, regulatory licensing and access to supply chain. This is particularly so for businesses that operate in sectors vulnerable to climate risks. Examples would include energy, transportation, agriculture, food, forest products, materials, buildings and financial services. It is becoming more common internationally for executive incentive schemes to include climate-related targets.
Effective communication and engagement with investors, employees and customers may increasingly depend on how effectively businesses can articulate how climate risks and opportunities are identified and addressed.
Legislative and regulatory compliance: As with other regulatory and compliance requirements, boards and senior management will need to ensure there are systems, processes and controls in place to ensure compliance with the increasing body of climate related legislation and regulation both at EU and domestic level applicable to their business, such as the Sustainable Finance Disclosures Regulation' - Regulation (EU) 2019/2088 (SFDR). Regulated businesses will also see increased monitoring and climate exposure analysis by, and evolving requirements from, their regulators.
Directors' responsibilities: All boards of Irish companies are required to engage in an informed and active stewardship over its affairs. This is in addition to ensuring regulatory and other compliance requirements are met. Climate risk and opportunities have not to date in Ireland explicitly been called out as components of boards' general stewardship or fiduciary duties, either by legislation or judicial determination. However, there is a growing acceptance that these general stewardship or fiduciary duties require boards to recognise and consider climate risks and opportunities and their impact on the business. This is particularly so for those duties to act in good faith and in the best interests of the company, its employees and members, and to act responsibly, exercising comparative skill, care and diligence.
Climate and ESG related considerations and disclosures in M&A and equity raise transactions will become increasingly prevalent and important as buyers and investors, particularly institutional investors, require greater transparency and accountability from their targets. Conducting ESG-focussed due diligence, allocation of risk in transaction documentation and post-acquisition ESG implementation will become a key component of these corporate activities.
Alongside existing ESG reporting and requirements, and measures such as the SFDR, the EU Commission has adopted a proposal for a Corporate Sustainability Reporting Directive (CSDR). Its purpose is to build on earlier ESG reporting measures such as SFDR by introducing consistent sustainability reporting standards, a requirement for audit assurance of reported information, and an extension of the regime to include large private companies and listed SMEs.
The UN sponsored multi-agency sustainable stock exchange initiative is just one initiative for progressing and enhancing performance of their member companies on ESG issues and encouraging sustainable development. It focusses on five principal topics: ESG Disclosure, Green Finance, Gender Equality, SME Growth and Securities Regulation. Partner exchanges include Euronext Dublin, London Stock Exchange, Euronext London, the New York Stock Exchange and NASDAQ.
Climate litigation has increased in many jurisdictions over the last number of years, as a way of both advancing certain climate objectives, and raising greater awareness of environmental concerns. This litigation can impact companies and its officers in a variety of ways including by pressuring governments to increase their ambition in carbon reduction leading to tighter regulation, by ensuring stricter enforcement of existing legislation, by challenging environmental assessment and permitting decisions for projects, and also enforcement of securities laws and consumer protection laws, misrepresentation and misleading advertising.
Recent years have seen a reformation of corporate governance in the wake of the global financial crisis, an ongoing reappraisal of who a corporation's stakeholders are understood to be, and the growth in significance of non-financial reporting, sustainability and climate change.
ALG's Corporate group has extensive experience in advising private and public company boards, investors and all other stakeholders in relation to corporate governance matters and corporate activity more generally including on M&A transactions. This experience spans requirements for companies listed on public markets, multinational groups with a significance in Ireland (or, through Ireland, the EU), significant Irish businesses, State owned entities, and regulated businesses.