Climate Change in the Pacific - Directors Duties
Introduction
No Director of a company doing business in the Pacific Region can afford to be a climate change denier. The World Bank in its publication “Acting on Climate Change and Disaster Risk for the Pacific” notes amongst other things that: “Pacific Island countries are on the frontline of climate change and natural hazard. In some countries, tides have already flooded homes and devastated livelihoods while rising sea levels have contaminated precious fresh water supplies”.
As many Pacific Nations are dependant on fishing, agriculture and tourism, companies operating in these sectors are particularly vulnerable to the impact of climate change. However, given the central importance of these sectors to the economies of Pacific nations, all companies if they are not directly impacted are likely to be indirectly impacted by climate change.
As these risks emerge, Directors of companies operating in Pacific nations are and will increasingly be required to have regard to the implications of climate change on their businesses in carrying out their duties.
Duties of Directors
The duties of Directors are set out in the companies legislation of the various Pacific nations.
While these duties are variously expressed, the central over arching obligation is to act in the best interests of the company. This requires not just a focus on the short term interests of the company but on its long term prosperity and survival. While this has traditionally involved a focus on ensuring returns to shareholders, modern governance practice requires Directors to have regard to the interests of broader stakeholders, such as employees, suppliers, customers and the community generally, in recognition of the fact that the company’s prosperity and survival relies on the ongoing support of its stakeholders.
Net Zero Emissions
Many large international companies have set themselves target dates by which they plan to reach net zero emissions. Some two hundred members of the World Business Council on Sustainable Development have committed to achieving net zero emissions by 2050.
It is unrealistic to expect that small Pacific based companies could achieve outcomes to match those of major international corporations, and no Court would find that Directors of such companies were duty bound to do so.
Nevertheless, having regard to their place in the Pacific community and recognising that the ongoing support of each company’s local community is necessary to ensure its prosperity and long term survival Directors should as a matter of good governance consider reasonable measures to reduce emissions and mitigate the impact of their operations on the environment.
Practical Action
In terms of practical action that Directors may take, the Australian Securities and Investments Commission has published Climate Change Risk Guidance for Directors. This guidance includes four factors:
1. Consider climate risk - Directors are required to identify and analyse climate risk as it affects their businesses in the short and long term as part of their normal decision making.
2. Develop and maintain strong and effective corporate governance – Directors need to ensure that climate risk is properly managed within the company and that the Board has proper oversight of this.
3. Comply with the law – Directors need to be aware of all applicable laws including in particular disclosure of risk in annual reports, prospectuses and the like.
4. Disclose useful information to investors – Shareholders and potential shareholders need to be made aware of climate related risks affecting the company.
ASIC’s guidance provides an appropriate framework within which Boards should identify, manage and disclose climate risk as it affects companies’ operations.
The key element is of course managing climate risk which, depending on a company’s business, may involve disaster contingency planning, insurance, the establishment of financial reserves, maintaining higher stock levels and diversification. Providing support to affected communities in which the company operates could also be seen as being in the company’s best interests.
Conclusion
Identifying and managing climate risk is a key Director responsibility which should be addressed to ensure that Directors are properly discharging their duties. This is particularly the case for Directors operating in the Pacific nations which are very vulnerable to the effects of climate change. This includes not just companies in sectors that are potentially directly affected by climate change, but all businesses.
An important but subsidiary issue is that Boards should consider what reasonable measures can be taken to reduce emissions and the impact of their operations on the environment.
Pacific Legal Network publish a "Directors Duties Guide to the Pacific" which you can access here.
Please feel free to contact us if you have any questions about Directors Duties and corporate governance in the Pacific.
Note: Pacific Legal Network is accredited as an observer organisation to the Green Climate Fund.
